This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in
partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially under-developed/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brown field FDI.

Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism
that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate
productivity and income grow, so do wages relative to intermediate input prices, which increases the
relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show
that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity
of the aggregate price level with respect to GDP per capita. The mechanism has stark implications
for industry-level real exchange rates that are strongly supported by the data.

We study how international trade affects manufacturing employment and the relative
wage of unskilled workers when goods and services are traded with different
intensities. Manufacturing trade reduces manufacturing prices worldwide, which reduces
manufacturing employment if manufactures and services are complements. We
document that manufacturing production is unskilled-labor intensive, so that these
changes increase the skill-premium. We incorporate this mechanism in a quantitative
trade model and show that trade has had a negative impact on manufacturing
employment and the relative wage of unskilled workers. The impact on the skill
premium was larger in developing countries where manufacturing is particularly
unskilled-labor intensive.

The price comparability provision of China’s accession protocol recognizes that WTO members
may face special difficulty in determining subsidies and dumping from China, due to its
government’s pervasive intervention in the economy. The provision permits importing members
to disregard domestic prices or costs in China and to use alternative benchmarks in determining
the normal value of Chinese exports. Consequently, this so-called nonmarket economy
methodology tends to inflate antidumping and countervailing duty rates.

Certain paragraphs of the provision determining dumping expire on 11 December 2016,
and yet the heated debate on China’s economic status post-December 2016 remains ongoing.
This paper studies the history of U.S. trade remedy actions against nonmarket economies and
traces recent developments and findings at the WTO dispute settlement body. Congressional
history shows that antidumping regulations in the U.S. have been constantly amended to catch up
with agency practices that discriminate against nonmarket economies. Meanwhile, the
Department of Commerce recently started to apply countervailing duties on Chinese imports and
has finally codified such practices into law. The paper offers many reasons to believe that the U.S.
is equipped with various trade remedy measures to continue ‘special treatment’ against China,
even if the country graduates from a nonmarket economy status.

We compare redistribution through trade restrictions vs. domestic lump-sum transfers.
When preferences are non-homothetic, even domestic lump-sum transfers affect relative prices. Thus, contrary to the conventional wisdom, domestic lump-sum transfers are not necessarily superior to distortionary trade policy. We develop this argument in the context of food export bans imposed by many developing countries in the late 2000s.

We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation.

654. Alviarez, Vanessa, Javier Cravino, and Andrei A. Levchenko, "The Growth of Multinational Firms in the Great Recession," November 11, 2016; Journal of Monetary Economics, 85 (January 2017), 50-64 (Carnegie-Rochester-NYU Series on Public Policy).
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Using a large firm-level dataset, this paper studies multinational firms’ performance
during the Great Recession. Foreign multinationals grew faster than local firms
outside of the crisis, but slower during the crisis. Industry and size differences between
domestic and foreign-owned firms account for much of this slowdown. However,
multinationals from different countries performed differently during the crisis.
The paper then assesses the role of multinationals in the global recession using a quantitative model. Had multinationals’ relative performance remained unchanged during
the crisis, the median country’s aggregate growth would have been 0.12% higher,
with a range of -0.13 to 0.5% across countries.

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.

As of August 2015, Greece’s loan repayments due to external creditors through 2057 summed to €319.5 billion, requiring an average debt payment on a flow basis of 4.1 percent of 2014 Greek GDP. This paper examines the economic impact of increases in distortionary taxes on consumption, capital and labor income as well as reductions in government expenditures sufficient to increase Greece’s primary balance by one percent of 2014 GDP – roughly a quarter of Greece’s total debt obligations. In the baseline case calibrated to the Greek economy, all of the tax and expenditure policies we consider produce declines in output in both the short- and long-run. Projections of the primary surplus based on static revenue scoring grossly overestimate the amount of actual revenue that Greece would raise due to the endogenous adjustment of capital and labor. Meeting the debt repayment schedule is substantially more costly because Greece is a small economy that is integrated with the larger European economy. Failure to incorporate the impact of capital and labor mobility results in a significant overestimate of future revenue. Delaying the implementation of tax increases or government expenditure cuts can help mitigate the short-run fall in output, but such delays require greater economic hardship in the long run.

I explore how the concept of “the terms of trade” has been used since it was coined by Marshall. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and was followed in this choice by almost all writers for the next several decades. Then, around 1980, Taussig’s choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to Viner’s argument for preferring that the terms of trade of a country be defined as the relative price of its exports.

We examine the impact of policy uncertainty on trade, prices and real income through
firm entry investments in general equilibrium. We estimate and quantify the impact of trade policy on China's export boom to the U.S. following its 2001 WTO accession. We find the accession reduced the U.S. threat of a trade war, which can account for over 1/3 of that export growth in 2000-2005. Reduced policy uncertainty lowered U.S. prices and increased its consumers' income by the equivalent of a 13 percentage point permanent tariff decrease. These findings provide evidence of large effects of policy
uncertainty on economic activity and the importance of agreements for reducing it.

This paper investigates the role of individual firms in international business cycle comovement
using data covering the universe of French firm-level value added, bilateral
imports and exports, and cross-border ownership over the period 1993-2007. At the
micro level, controlling for firm and country effects, trade in goods with a particular
foreign country is associated with a significantly higher correlation between a firm and
that foreign country. In addition, foreign multinational affliates operating in France
are significantly more correlated with the source economy. The impact of direct trade
and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than noninternationally
connected firms, the firms directly linked to foreign countries represent
only 8% of all firms, but 56% of all value added, and account for 75% of the observed
aggregate comovement. Without those linkages the correlation between France and foreign
countries would fall by about 0.091, or one-third of the observed average business
cycle correlation of 0.29 in our sample of partner countries. These results are evidence of
transmission of business cycle shocks through direct trade and multinational ownership
linkages at the firm level.

We study the differential impact of large exchange rate devaluations on the cost of
living at different points on the income distribution. Across product categories, the
poor have relatively high expenditure shares in tradeable products. Within tradeable
product categories, the poor consume lower-priced varieties. Changes in the relative
price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households
relative that of the high-income households. We quantify these effects following the
1994 Mexican peso devaluation and show that their distributional consequences can
be large. In the two years that follow the devaluation, the cost of the consumption
basket of those in the bottom decile of the income distribution rose between 1.46 and
1.6 times more than the cost of the consumption basket for the top income decile.

The relationships between exchange rates, capital controls and foreign reserves during the financial crisis suggest that reserve management plays a much more central role than has typically been emphasized in international finance models. Reserves seem to be especially important for non‐EZ European countries, not only for those with currencies in the ERM II, but also for those European countries in intermediate regimes that hope to deter currency market pressure, and in so doing help to mitigate trilemma trade‐offs.

We develop a model of foreign direct investment (FDI) in which financially liquid foreign firms acquire liquidity-constrained target firms. Using a large dataset of emerging-market acquisitions, we find evidence supporting three central predictions of the model: (i) firms in external finance dependent and intangible sectors are more likely to be targets of foreign acquisitions; (ii) these targets have ownership structures with larger foreign stakes; (iii) these effects are most prominent in countries with low levels of financial development. The regression evidence indicates that liquidity is at least as economically important as technology- or trade-related motives for FDI in emerging-market economies.

Motivated by a set of stylized facts, we develop a model of cross-border mergers and acquisitions (M&As) to study foreign direct investment (FDI) in emerging markets. We compare acquisitions undertaken during financial crises – so called fire-sale FDI – with acquisitions made during non-crisis periods to examine whether the outcomes differ in the ways predicted by the model. Foreign acquisitions are driven by two sources of value creation. First, acquisitions by a foreign firm relax the target's credit constraint (i.e., a liquidity motive). Second, acquisitions exploit operational synergies between the target and the acquirer (i.e., a synergistic motive). During crises credit conditions tighten in the target economy and the liquidity motive dominates. The model predicts that during crisis relative to non-crisis periods, (1) the likelihood of foreign acquisitions is higher; (2) the proportion of foreign acquisitions in the same industry is lower; (3) the average size of ownership stakes is lower; and (4) the duration of acquisitions is lower (i.e., acquisition stakes are more likely to be flipped). We find support for (1) but not for the other three predictions. The results thus suggest that foreign acquisitions in emerging markets do not differ in these important ways between crisis and normal periods.

What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong crosscountry externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a "race to the bottom" in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.

We investigate how multinational firms contribute to the transmission of shocks across countries using a large firm-level dataset that contains ownership information for 8 million firms in 34 countries. We use these data to document two novel empirical patterns. First, foreign affiliate and headquarter sales exhibit strong positive comovement: a 10% growth in the sales of the headquarter is associated with a 2% growth in the sales of the affiliate. Second, shocks to the source country account for a significant fraction of the variation in sales growth at the source-destination level. We propose a parsimonious quantitative model to interpret these findings and to evaluate the role of multinational firms for international business cycle transmission. For the typical country, the impact of foreign shocks transmitted by all foreign multinationals combined is non-negligible, accounting for about 10% of aggregate productivity shocks. On the other hand, since bilateral multinational production shares are small, interdependence between most individual country pairs is minimal. Our results do reveal substantial heterogeneity in the strength of this mechanism, with the most integrated countries significantly more affected by foreign shocks.

This paper uses the historical episode of the near-elimination of commuting
from the West Bank into Israel, which caused a large and rapid
expansion of the local labor force in the West Bank, to test the predictions
of the Heckscher-Ohlin-Vanek (HOV) model of trade. I use
variation between districts in the West Bank to test these predictions,
and find strong support for them: Wage changes were not correlated
with the size of the shock to the district labor force (Factor Price Insensitivity);
Districts that received larger influx of returning commuters
shifted production more towards labor intensive industries (Rybczynski
effect); and on the consumption side, the data are consistent with the
assumption of identical homothetic preferences, which, combined with
the production results, supports the Heckscher-Ohlin-Vanek theorem on
the factor content of trade.

Trade costs are a major barrier to efficient farming in developing countries.
I study land use patterns and input demand in Peru, a country where goods
are traded at a high cost, both domestically and with the rest of the world. I
then quantify the equilibrium effect of paving existing roads on productivity
and real incomes. To do so, I develop a model of agricultural specialization
and trade, and quantify it using a new dataset on Peruvian agriculture, which
includes disaggregated information on crop prices, yields and land allocations.
While typically raising productivity, paving roads on a large scale creates both
winners and losers, depending on whether prices are set in domestic markets,
or whether workers are net food buyers. In the simulations, an average farmer
gains 14% in productivity and 5% in welfare.

640. Levchenko, Andrei A. and Nitya Pandalai-Nayar, "TFP, News, and 'Sentiments': The International Transmission of Business Cycles," February 27, 2015.
ABSPDF

We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks -- surprise TFP, news of future TFP, and “sentiment” -- from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of short-run business cycle fluctuations in the US. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for up to 50% of the forecast error variance of Canadian GDP and about one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization.

Two common views are that a country cannot develop without a strong manufacturing base and
that trade restrictions are essential to facilitate the development of that strong manufacturing base and thus spur economic growth. We ask:

Does a strong manufacturing share of GDP facilitate economic growth?

Do trade restrictions ensure the development of a strong manufacturing base?

How can governance affect manufacturing share?

And are the relationships we find robust across regions?

We find the manufacturing share is not significantly correlated with a higher standard of living. Nor is it related significantly and consistently to economic growth. We also find that trade restrictions both at home and abroad shrink the manufacturing base and smother economic growth. A better way than protectionism and subsidies specific to industry to enhance economic growth is to improve governance effectiveness and the quality of regulation.

638. Deardorff, Alan V., "Trade Implications of the Trans-Pacific Partnership for ASEAN and Other Asian Countries," July 24, 2013.
ABSPDF

The Trans-Pacific Partnership (TPP) aspires to become a state-of-the-art trade agreement linking 12 countries on both sides of the Pacific. In addition to establishing a Free Trade Agreement (FTA) among these countries, negotiators are pursuing a long list of other issues, both trade-related and non-trade related. This paper examines the likely effects of the TPP on trade alone, taking into account the fact that all of the potential members of the TPP are already participants in other FTAs. Using information from the World Trade Organization on the existence of these FTAs, plus data on the identities of countries’ major trading partners for both exports and imports, I discuss the likely effects on a list of countries in terms of trade creation, trade diversion, and the reversal of trade diversion that has already occurred due to existing FTAs. The list of countries includes all of the members of the TPP as well as of ASEAN. In addition it includes ten additional Asian economies that are not part of either.

This paper investigates both aggregate and distributional impacts of the trade integration of
China, India, and Central and Eastern Europe in a quantitative multi-country multi-sector
model, comparing outcomes with and without factor market frictions. Under perfect within-country
factor mobility, the gains to the rest of the world from trade integration of emerging
giants are 0.37%, ranging from -0.37% for Honduras to 2.28% for Sri Lanka. Reallocation
of factors across sectors contributes relatively little to the aggregate gains, but has large
distributional effects. The aggregate gains to the rest of the world are only 0.065 percentage
points lower when neither capital nor labor can move across sectors within a country. On the
other hand, the distributional effects of the emerging giants' trade integration are an order of
magnitude larger, with changes in real factor returns ranging from -5% to 5% across sectors
in most countries. The workers and capital owners in emerging giants' comparative advantage
sectors such as Textiles and Wearing Apparel experience greatest losses, while factor owners
in Printing and Medical, Precision and Optical Instruments normally gain the most.

Empirical studies show that tradable consumption goods are more expensive in rich
countries. This paper proposes a simple yet novel explanation for this apparent failure of the law
of one price: Consumers' utility from tradable goods depends on their consumption of
complementary goods and services. Monopolistically competitive firms charge higher prices in
countries with more complementary goods and services because consumer demand is less elastic
there. The paper embeds this explanation within a static Krugman (1980)-style model of
international trade featuring differentiated tradable goods. Extended versions of the model can
account for the high prices of services in rich countries, as well as for several stylized facts
regarding investment rates and relative prices of investment and consumption across countries.
The paper provides direct evidence in support of this new explanation. Using free-alongside-ship
prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods
are higher in countries with high consumption of relevant complementary goods, conditional on
per capita income and other country-level determinants of consumer goods prices.

635. Monarch, Ryan, Jooyoun Park, and Jagadeesh Sivadasan, "Gains from Offshoring? Evidence from U.S. Microdata," January 21, 2013; published as "Domestic Gains from Offshoring? Evidence from TAA-Linked U.S. Microdata,"Journal of International Economics 105 (March 2017).
ABSPDF

We construct a new linked data set with over one thousand offshoring events by matching
Trade Adjustment Assistance program petition data to micro-data from the U.S. Census Bureau.
We exploit this data to assess how offshoring impacts domestic firm-level aggregate employment,
output, wages and productivity. A class of models predicts that more productive firms engage
in offshoring, and that this leads to gains in output and (measured) productivity, and potential
gains in employment and wages, in the remaining domestic activities of the offshoring firm.
Consistent with these models, we find that offshoring firms are on average larger and more
productive compared to non-offshorers. However, we find that offshorers suffer from a large
decline in employment (32 per cent) and output (28 per cent) relative to their peers even in the
long run. Further, we find no signicant change in average wages or in total factor productivity
measures at affected firms. We find these results robust to a variety of checks. Thus we find no
evidence for positive spillovers to the remaining domestic activity of firms in this large sample
of offshoring events.

I provide novel evidence for the impact of trade policy uncertainty on exporters. In
a dynamic, heterogeneous firms model, trade policy uncertainty will delay the entry of
exporters into new markets and make them less responsive to applied tariff reductions.
Policy instruments that reduce or eliminate uncertainty, such as binding trade policy
commitments at the WTO, increase entry. The predictions are tested on disaggregated,
product-level Australian imports with model-consistent measures of uncertainty. Reducing
policy uncertainty generates more product entry than unilateral liberalization.
The results illuminate and quantify an important new channel for trade creation.

This paper evaluates the role of sectoral heterogeneity in determining the gains from trade. We
first show analytically that in the presence of sectoral Ricardian comparative advantage, a one -sector
sufficient statistic formula that uses total trade volumes as a share of total absorption
systematically understates the true gains from trade. Greater relative sectoral productivity
differences lead to larger disparities between the gains implied by the one-sector formula and
the true gains. Using data on overall and sectoral trade shares in a sample of 79 countries
and 19 sectors we show that the multi-sector formula implies on average 30% higher gains
from trade than the one-sector formula, and as much as 100% higher gains for some countries.
We then set up and estimate a quantitative Ricardian-Heckscher-Ohlin model in which no
version of the formula applies exactly, and compare a range of sufficient statistic formulas to
the true gains in this model. Confirming the earlier results, formulas that do not take into
account sectoral heterogeneity understate the true gains from trade in the model by as much
as two-thirds. The one-sector formulas understate the gains by more in countries with greater
dispersion in sectoral productivities.

Less developed countries tend to experience higher output volatility, a fact that is in
part explained by their specialization in more volatile sectors. This paper proposes
theoretical explanations for this pattern of specialization -- with the complexity of the
goods playing a central role. Specically, less developed countries with lower institutional ability to enforce contracts, or alternately, with low levels of human capital will
specialize in less complex goods which are also characterized by higher levels of output
volatility. We provide novel empirical evidence that less complex industries are indeed
more volatile.

This paper analyzes the extent to which firms use trade credit to reallocate capital in
response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade
credit to reallocate capital from firms facing low tax rates to those facing high tax rates.
Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in
low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade
credit to borrow: ten percent lower local tax rates are associated with net trade credit positions
that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of lowtax,
low-return environments is also illustrated by reactions of U.S. firms to the temporary
repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were
significantly more likely than others to repatriate dividends to parent companies in the United
States.

This paper uses a database covering the universe of French firms for the period 1990-2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded set of estimating equations that decompose firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (the "granularity" hypothesis of Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.

A common presumption in macroeconomics and development economics is that
increased growth in the aggregate enhances welfare for everyone in the economy. I show that
instead, if the underlying growth is a productivity increase in the sector consumed primarily by
one group, the welfare of a second group may fall. I demonstrate this effect in two cases. In the
first case, skill-biased technological change in sectors consumed by the skilled rich increases
their income beyond the increase in economic wealth, causing a decline in the consumption and
welfare of the low-skilled poor. This result stands in contrast to the standard model of skillbiased
technological change. The second case examines trade between two countries, and
demonstrates circumstances under which an increase in productivity in the nontradable sector of
one country causes a welfare decline for the other country. The paper discusses evidence in
support of the effects in both cases. This analysis demonstrates that a rising tide need not lift all
boats and that the precise nature of consumption patterns is important for welfare.

We develop a model of international trade with two dimensions of firm heterogeneity and export
quality constraints that manifest as higher variable trade costs for lower quality firms. In addition
to "productivity", firms are also heterogeneous in their "caliber" -- the ability to develop high-quality products with lower fixed outlays. The model predicts various conditional exporter premia.
Conditional on size, exporters sell higher quality products, charge higher prices, pay higher input
prices and higher wages, and use capital more intensively. Some of these predictions have already
been documented in the empirical literature. However, although they are apparently an intuitive
implication of single-attribute models, conditional exporter premia cannot be rationalized through
these models as they imply no variation in export status once size is controlled for. We test these
predictions using manufacturing establishment data for India, the U.S., Chile, and Colombia, and
find strong support for the model. We also investigate the sources of export quality constraints
using firm-level trade shipment data for the U.S. and India. Destination per-capita income plays a
key role for firms in India. For firms in the U.S., both distance and destination per-capita income
play a role, though the effect of per-capita income is about a third of its magnitude for India.

This paper evaluates the welfare impact of observed levels of migration and remittances in both origins and destinations, using a quantitative multi-sector model of the global economy calibrated to aggregate and firm-level data on 60 developed and developing countries. Our framework accounts jointly for origin and destination characteristics, as well as the inherently multi-country nature of both migration and other forms of integration, such as international trade and remittance flows. In the presence of firm heterogeneity and imperfect competition larger countries enjoy a greater number of varieties and thus higher welfare, all else equal. Because of this effect, natives in countries that received a lot of migration -- such as Canada or Australia -- are better off. The remaining natives in countries with large emigration flows -- such as Jamaica or El Salvador -- are also better off due to migration, but for a different reason: remittances. The quantitative results show that the welfare impact of observed levels of migration is substantial, at about 5 to 10% for the main receiving countries and about 10% for the main sending countries.

This paper investigates the welfare gains from European trade integration, and the role of comparative advantage in determining the magnitude of those gains. We use a multi-sector Ricardian model implemented on 79 countries, and compare welfare in the 2000s to a counterfactual scenario in which East European countries are closed to trade. For West European countries, the mean welfare gain from trade integration with Eastern Europe is 0.16%, ranging from zero for Portugal to 0.4% for Austria. For East European countries, gains from trade are 9.23% at the mean, ranging from 2.85% for Russia to 20% for Estonia. For Eastern Europe, comparative advantage is a key determinant of the variation in the welfare gains: countries whose comparative advantage is most similar to Western Europe tend to gain less, while countries with technology most different from Western Europe gain the most.

This paper evaluates the global welfare impact of China's trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. We simulate two alternative productivity growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson 2004), the large majority of countries in the sample, including the developed ones, experience an order of magnitude larger welfare gains when China's productivity growth is biased towards its comparative disadvantage sectors. We demonstrate both analytically and quantitatively that this finding is driven by the inherently multilateral nature of world trade. As a separate but related exercise we quantify the worldwide welfare gains from China's trade integration.

We analyze theoretically and empirically the impact of comparative advantage in
international trade on fertility. We build a model in which industries differ in the extent to which they use female relative to male labor, and countries are characterized
by Ricardian comparative advantage in either female- or male-intensive goods. The
main prediction of the model is that countries with comparative advantage in female-intensive goods are characterized by lower fertility. This is because female wages, and
therefore the opportunity cost of child-rearing are higher in those countries. We demonstrate empirically that countries with comparative advantage in industries employing
primarily women exhibit lower fertility. We use a geography-based instrument for trade
patterns to isolate the causal effect of comparative advantage on fertility.

623. Shkura, Iryna and Barbara Peitsch, "Assessing Ukrainian Banking Performance Before and After the Crisis," 2011; in Journal of Entrepreneurship, Management and Innovation, 2011, No 7.
ABSPDF

The main goal of this paper is to analyze the impact of the 2008 global financial crisis on the Ukrainian
financial system, and on Ukrainian bank performance. Our analysis is based on key bank performance
indicators from 2003-2011. Bank assets, liabilities and capital are analyzed, and changes in bank management
are taken into consideration. Special attention is paid to changes in bank stock prices of two of the largest
banks, following the crisis.

The establishment of international labor standards linked to market access within the WTO is among the proposals intended to remedy the gross violations of labor and human rights that accompany international trade and investment. Yet, the WTO Charter and, previously, the GATT are virtually silent on the potential inhumanity of globally integrated goods and services markets. Despite intense pressure from the United States and the European Union, the Singapore Ministerial Declaration (December 1996), while acknowledging the importance of international labor standards, identified the International Labor Organization (ILO) as the competent body to establish and monitor labor standards. However, advocates for international labor standards ultimately gained access to the process of rules-setting in the WTO indirectly through Article XXIV governing the creation of customs unions and free trade agreements and, more importantly, the 1971 GSP Decision permitting special and differential treatment of developing country exports.

Thus, contrary to the WTO Ministerial dictates, labor standards are now routinely enforced by the prospective loss of preferential tariff concessions and market access. We discuss in this context a mechanism for linking ILO-established labor standards, monitoring by the ILO, and enforcement through the threat of lost trade concessions that emerged fully operational in the 1999 U.S.-Cambodia Bilateral Textile Trade Agreement. Under this agreement, the United States provided Cambodia access to US markets by giving expanded apparel and textile quotas conditional on improved working conditions in the garment sector.

We also discuss the labor and human-rights issues that emerge in a globalizing world economy, the market failures that produce labor and human-rights violations, and the role of labor standards in mitigating the most grievous of consequences. We then discuss the evidence on the impact that labor standards have on trade, firm behavior and investment, and on workers, and whether or not there is a race to the bottom, which we conclude not to be the case.

I first review some of the major influences that shaped my early years. I then relate the
subsequent developments in my professional career, including my research orientation, chief
publications, collaborative relationships, and longstanding involvement in undergraduate and
graduate teaching and supervision.

Using Korean firm-level data on publicly-listed and privately-held firms together
with firm exit data, we find strong evidence of the balance-sheet effect for small
firms at both the intensive and extensive margins. During the crisis, small firms with
more short-term foreign debt are more likely to go bankrupt, and experience larger
sales declines conditional on survival. The extensive margin accounts for a large fraction
of small firms’ adjustment during the crisis. Consistent with many studies in the
literature, large firms with larger exposure to foreign debt paradoxically have better
performance during the crisis at both the intensive and extensive margin.

Using confidential microdata from the US Census, we find that the fraction of manufacturing plants that export rose from 21% in 1987 to 39% in 2006. It has been suggested that similar trends in other countries may have been caused by declining costs of entering foreign markets. Our study tests this hypothesis for the first time. Both reduced form and structural estimation approaches find little evidence that the entry costs declined significantly in the US over this period. We instead argue that changes in other factors that determine export status are sufficient to explain these trends.

This paper examines the relationship between foreign equity participation and
average wages at the plant level. I show that using a binary measure for foreign
ownership, as is the traditional practice in the literature, leads to biased estimates
of the foreign ownership wage premium, compared to the use of a continuous mea-
sure if the true relationship is linear. Using nonparametric and semi-parametric
techniques I find this is the case: the relationship between the level of foreign
ownership and average wages is better approximated as linear rather than binary.
I find that a ten percentage point increase in foreign equity participation is asso-
ciated with an approximately 4% increase in the average wage of non-production
workers. These results are the first to show that the wage premium due to foreign
ownership varies with the level of foreign ownership in a continuous manner.

This paper studies the integration strategies of multinational firms in a multiperiod
model under incomplete contracts and uncertainty. I incorporate continuous
levels of integration to the study of organizational choice in an existing
model of foreign direct investment (Antras and Helpman, 2004) and extend the
model to a multi-period framework of learning. The joint productivity of the two
partners in an integrated firm is unknown initially to both sides and is revealed
only after continued joint production. The model gives rise to a nondegenerate
distribution of foreign ownership at the firm level and shows that the optimal
level of integration rises with the age of the firm. These patterns are supported
by detailed plant-level data on share of foreign ownership. The model predicts
that the degree of foreign ownership is an increasing function of joint productivity
and intra-firm trade should rise over time as a result of increased control by
multinationals. I test the implications of my theory with plant-level data from
Turkey and find support for the predictions of the model.

This paper explores the role of financial factors in the 2008-9 collapse of U.S. imports
and exports. Using highly disaggregated international trade data, we examine whether the
cross-sectoral variation in how much imports or exports fell during this episode can be
explained by financial variables. To do this, we employ a wide variety of possible
indicators, such as standard measures of trade credit and external finance dependence,
proxies for shipping lags at the sector level, and shares of intra-firm trade in each sector.
Overall, there is very little evidence that financial factors played a role in the collapse of
U.S. trade.

615. Ahn, Dukgeun and Jieun Lee, "Countervailing Duty against China: Opening a Pandora's Box in the WTO System?," April 26, 2011; Journal of International Trade Law 14(2), 2011.
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In this paper, we trace the jurisprudential history of the applicability of US countervailing duty (CVD)
law to non-market economies (NMEs). We describe how, since the United States reversed its long
standing policy of not imposing CVDs on NMEs, concurrent application of antidumping (AD) and
countervailing duties has become the country's major trade remedy action against China. Although the
WTO panel rejected China's claim of WTO-inconsistency regarding the current US practices, the US
Court of International Trade firmly ruled that the Department of Commerce's double counting of AD and
CVD against China violates domestic regulation. Finally, the WTO Appellate Body ruled that this
'double remedy' violates the rule to levy CVDs 'in the appropriate amounts' under Article 19.3 of the
SCM Agreement. We will argue that, although the Appellate Body's ruling is praiseworthy in preventing
an illogical practice, its legal reasoning may give rise to some doubts and controversy when the
negotiating history of Article 19 is examined. We will also analyze key features of current double remedy
practices in the United States and Canada.

This paper explores how far free trade agreements (FTAs) have strengthened or weakened global governance of the trading system. We open with an analysis of the altered political and economic context within which countries have come, in recent years, to assign a new importance to regional and bilateral trade agreements in their trade policies. We then consider each of the main provisions included in FTAs and comment on how these may separately affect the management of trade relations. We conclude with some observations of the broader trends affecting global governance that are associated with the spread of trade agreements as a whole.

613. Stern, Robert M., "Trade in Financial Services -- Has the IMF Been Involved Constructively?," October 10, 2010; in Margin: The Journal of Applied Economic Research, Special Issue on International Trade Policy, Vol 5, Issue 1, February 2011.
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This paper considers the key policy issues related to liberalization of trade in financial services that the IMF should be concerned with, and the role the IMF has played in advising on policies related to trade in financial services in its bilateral and multilateral surveillance and conditionality attached to lending programs. IMF staff were generally aware of the literature and country experiences showing the benefits of financial liberalization. But Fund advice in support of liberalization can be best interpreted to be in support of country unilateral policy actions and the dynamics of the WTO accession process.

612. Brown, Andrew G. and Robert M. Stern, "Fairness in the WTO Trading System," October 9, 2010. To be published in Amrita Narlikar, Martin J. Daunton, and Robert M. Stern (eds.), The Oxford Handbook on the World Trade Organization.
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We first provide a brief critique of the utilitarian principle as a guide to fairness in the world trading system. We then turn to the alternative conception of fairness in terms of economic equity, exploring the meaning of its two components: equality of opportunity and distributive justice. We thereafter proceed to discuss the conditions of autonomy and reciprocity that have to be met in order to realize greater fairness in multilateral trade negotiations. Next, we comment on aspects of procedural justice that are necessary for the functioning of a fair trading system. Finally, we conclude with an overall assessment of the considerations of the fairness achieved in the Uruguay Round multilateral negotiations.

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of U.S.-Japan trade policies. The menu of policies encompasses the various preferential U.S. and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers by the two countries, and global (multilateral) free trade. The U.S. preferential agreements include the FTAs approved by the U.S. Congress with Chile and Singapore in 2003, those signed with Central America, Australia, and Morocco and receiving Congressional approval in 2004, and prospective FTAs with the Southern African Customs Union (SACU), Thailand, and the Free Trade Area of the Americas (FTAA). The Japanese preferential agreements include the bilateral FTA with Singapore signed in 2002 and prospective FTAs with Chile, Indonesia, Korea, Malaysia, Mexico, Philippines, and Thailand. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small in the United States and Japan, but vary across the individual sectors depending on the patterns of the bilateral liberalization. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. Data limitations precluded analysis of the welfare effects of the different FTA rules of origin and other discriminatory arrangements.

In comparison to the welfare gains from the U.S. and Japan bilateral FTAs, the gains from both unilateral trade liberalization by the United States, Japan, and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. and Japan FTAs are based on "hub" and "spoke" arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.

Using an industry-level dataset of production and trade spanning 75 countries and 5 decades,
and a fully speciﬁed multi-sector Ricardian model, we estimate productivities at sector level
and examine how they evolve over time in both developed and developing countries. We find
that in both country groups, comparative advantage has become weaker: productivity grew
systematically faster in sectors that were initially at the greater comparative disadvantage. The
global welfare implications of this phenomenon are significant. Relative to the counterfactual
scenario in which an individual country’s comparative advantage remained the same as in the
1960s, and technology in all sectors grew at the same country-specific average rate, welfare
today is 1.9% lower at the median. The welfare impact varies greatly across countries, ranging
from
-0.5% to 6% among OECD countries, and from -9% to 27% among non-OECD countries.
Remarkably, for the OECD countries, nearly all of the welfare impact is driven by changes
in technology in OECD countries, and for the non-OECD countries, nearly all of the welfare
impact is driven by changes in technology in non-OECD countries.

609. Deardorff, Alan V., "Post-Doha Trade Policy Options for a Small Country," June 15, 2010; in Margin: The Journal of Applied Economic Research, Special Issue on International Trade Policy, Vol 5, Issue 1, February 2011.
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This paper uses a partial equilibrium model of two small countries, within a large world
economy, implementing reciprocal tariff cuts on each other’s exports in a regional trade
agreement (RTA) and compares the effects with unilateral most-favored-nation (MFN) tariff
cuts. The reciprocal cuts are shown to be more likely beneficial to a country the larger is the
partner country’s trade. The welfare effects of a country’s own tariff cut on imports are also
compared to the effects on its welfare of the partner-country’s tariff cut on its exports. If tariff
levels are low, the latter is seen to be larger than the former. Implications of the analysis are that,
if multilateral trade liberalization is unlikely, then small countries should seek to form RTAs
with countries larger than themselves. In addition, to assure that they have something to offer in
such arrangements, they should not go too far in unilaterally reducing their MFN tariffs.

We offer a simple variant of the standard Heckscher-Ohlin Model that
explains how a developing country, by opening to trade with a large capital abundant economy, can be induced to shift resources into more capital-intensive
production than what it was producing in autarky. As a result it experiences a
rise in its return to capital and, if capital is internationally mobile, both an
increase in its capital stock and an increase in trade. These results arise in a
model in which both a traditional and a modern sector can produce final goods
that are perfect substitutes. The modern sector uses intermediate inputs that
differ in their relative capital intensities, while being both more capital intensive
than the traditional sector. The results of this model accord well with the
experience of the Asian Tiger economies during the early decades of their
export-oriented industrialization.

Gary R Saxonhouse was one of the leading world scholars on Japanese economy. Born in New York City in 1943, he attended Yale University, where he received his PhD in Economics in 1971. He joined the Faculty of Economics at the University of Michigan beginning in 1970, where he taught throughout his career. The selection of his published papers that comprises this two-volume publication is a testimony and tribute to his remarkable accomplishments and influence that were cut short by his untimely death in November 2006, following a battle with leukemia.

This paper quantifies the effects of trade liberalization on local labor market outcomes and
workers' migration patterns. I extend the classic specific-factors model to examine the impact
of national price changes on local labor markets. The model describes how tariff changes across
industries affect wages in local labor markets within the liberalizing country. In particular,
wages will fall in regions whose workers are concentrated in industries facing the largest tariff
cuts, and workers will then migrate away from these regions in favor of areas facing smaller
tariff cuts. This result provides a theoretical foundation for a prevalent empirical approach in
previous studies of local labor markets and lends economic interpretations to estimates that
allow the researcher to evaluate the magnitude of results along with their direction.

I then use these theoretical results to measure how Brazil's 1987-1995 trade liberalization
affected wages and interstate migration within the country. I find that regions whose output
faced a 10% larger liberalization-induced price decline experienced a 7% larger wage decline. In
addition, liberalization resulted in a substantial shift in migration patterns. The most affected
Brazilian states gained or lost approximately 2% of their populations as a result of liberalization-
induced shifts in migration patterns. These results demonstrate the empirical value of the
specific-factors framework developed here and represent the first systematic evaluation of the
effects of liberalization on internal migration.

605. Cattaneo, Olivier, Michael Engman, Sebastian Saez, and Robert M. Stern, International Trade in Services: New Trends and Opportunities for Developing Countries (Description and Table of Contents), July, 2010.
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International trade in services also provides an assessment of how policy makers can further bolster their service industries by leveraging the changes prompted by technological advancements. The book provides policy recommendations that include the reduction of barriers to services trade across all sectors and the promotion of health- and environment-related development policies that should be promoted in parallel with a burgeoning services market. The first recommendation is considered the most important, because it focuses on the need to ensure trade openness, which helps ensure the access to services and promotes the quality of services provision through foreign and domestic competition. Moreover, the issue of temporary movement of labor is another focus of this book, given that it is one of the most important means of service exports for developing countries. This is an issue that is considered technically complex and politically sensitive because of its political and security implications. The book examines mechanisms that have been used by various countries to liberalize the temporary movement of persons and concludes that regardless of the negotiating forum- multilateral, regional, or bilateral-the policy making results on temporary movement of labor are, so far, modest and limited to a small range of categories. However, it proposes alternative ways to move forward that require further analysis by countries and relevant international organizations, including the World Bank.

604. Stern, Robert M. and Alokesh Barua, India and the WTO: Issues and Negotiating Strategies (Description and Table of Contents), July, 2010.
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This book serves two purposes. It provides a straightforward exposition of the complex issues pertaining to the WTO agreements and negotiations, and it presents rigorous analyses of the impact of the WTO-induced reforms on the Indian economy. The book addresses a number of salient issues, including: why trade liberalization might be beneficial for both developed and developing countries and in their long-run economic interests; what India's interests are in a multilateral forum like the WTO and how best India could utilize this forum to realize maximum advantage; whether India has a clear cut and well-defined set of negotiating strategies; how the economic reforms have affected different segments of the economy since the inception of the WTO in 1995; whether the reform measures conform to India's long-term economic interests; whether the benefits from the WTO-induced reforms are fairly and evenly distributed across the regions and across the population; and whether there is evidence to support that economic reforms have led to a decrease in income inequality and poverty in India. Our hope accordingly is that this book will contribute towards the understanding of the causality between the actual economic events and the WTO induced reforms.

603. Levenstein, Margaret, Jagadeesh Sivadasan, and Valerie Suslow, "The Effect of Competition on Trade Patterns: Evidence from the Collapse of International Cartels," June 21, 2010.
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How do changes in competitive intensity affect trade patterns? In this paper, we exploit a quasinatural
experiment associated with increased anti-trust enforcement activity over the last two
decades. A large number of international markets underwent a change in competitive intensity
as they shifted from explicit collusion to oligopolistic competition. We draw on models of
collusive arrangements in spatially separated markets to generate testable predictions of the
effects of collusion on price, trade patterns and concentration. One set of models (Pinto 1986,
Fung 1991, building on Brander and Krugman 1983) suggests that colluding firms in
commodity markets are likely to specialize geographically, while competing oligopolists are
more likely to invade each others’ markets. More recent models (Baake and Normann 2002,
Bond and Syropoulos 2008) suggest that efficient cartel arrangements may necessitate marketsharing
and cross-hauling of goods, as these entail lower defection profits. We analyze detailed
trade data linked to descriptive information from ten international cartels to test these
predictions. Consistent with both sets of models, we confirm significant declines in prices
following the breakup of each of the ten cartels. Contrary to conventional wisdom, and
consistent with the more recent oligopoly trade models, we find no significant change in spatial
patterns of trade; there is no significant change in the effect of distance on trade. Neither do we
find evidence of significant changes in concentration or rearrangement of market shares.

Many developing countries have increased their foreign reserve stocks dramatically in recent
years, in large part motivated by the desire for precautionary self-insurance. One of the negative
consequences of large accumulations for these countries is the risk of valuation losses. In this
paper we examine the implications of systematic reserve decumulation by the Czech authorities
aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not
intended to influence the value of the koruna relative to the euro. Initially the timing and size of
reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal
installments within the day). This project examines whether these reserve sales, both during the
regime of discretionary timing as well as when sales occurred every day, had unintended
consequences for the domestic currency. Our findings using intraday exchange rate data and
time-stamped reserve sales indicate that when decumulation occurred every day these sales led to
significant appreciation of the koruna. Overall, our results suggest that the manner in which
reserve sales are carried out matters for whether reserve decumulation influences the relative
value of the domestic currency.

This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the
United States. Traditionally, direct investment flowed from developed to developing countries, bringing
with it superior technology, organizational capital, and access to international capital markets, yet
increasingly there is a trend towards “capital flowing uphill” with emerging market investors acquiring a
broad range of assets in developed countries. Using transaction-specific information and firm-level
accounting data we evaluate the operating performance of publicly traded U.S. firms that have been
acquired by firms from emerging markets over the period 1980-2007. Our empirical methodology uses a
difference-in-differences approach combined with propensity score matching to create an appropriate
control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose
U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched
non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and
employment decline while profitability rises, suggesting significant restructuring of the target firms.

International reserve accumulation by developing countries is just one example of the
puzzling behavior of international capital flows. Capital should flow to where its return
is highest, which ought to be where capital is scare. Yet recent data suggest the opposite
– net capital flows from developing countries to industrialized countries. This paper
examines the role of financial market development in the accumulation of international
reserves. In countries with underdeveloped capital markets the government’s
accumulation of reserves may substitute for what would otherwise be private sector
capital outflows. Effectively, these governments are acting as financial intermediaries,
channeling domestic savings away from local uses and into international capital markets,
thereby offsetting the effects of domestic financial constraints that lead to excessive
private sector exposure to potential capital shortfalls.

This paper uses simple trade theory to interpret global imbalance. A world equilibrium in
which one country runs a trade surplus and the other a deficit can be interpreted as the welfare
improving outcome of free inter-temporal trade. However, comparative advantage would predict
that the surplus would arise in the more slowly growing economy, unless consumer preferences
differ sufficiently to reverse that. In order to explain the apparent situation of the United States
and China in the world today without resorting to such differences in preferences, the paper
suggests that both countries may be using policies that, in effect, subsidize the export of the
goods in which they have comparative inter-temporal disadvantage. If this is the case, the
resulting trade reduces world welfare compared to autarky, and it can easily make both countries
worse off.

Existing estimates of power laws in firm size typically ignore the impact of international trade.
Using a simple theoretical framework, we show that international trade systematically affects
the distribution of firm size: the power law exponent among exporting firms should be strictly
lower in absolute value than the power law exponent among non-exporting firms. We use a
dataset of French firms to demonstrate that this prediction is strongly supported by the data.
While estimates of power law exponents have been used to pin down parameters in theoretical
and quantitative models, our analysis implies that the existing estimates are systematically
lower than the true values. We propose two simple ways of estimating power law parameters
that take explicit account of exporting behavior.

597. Brown, Drusilla K. and Robert M. Stern, "International Trade, Labour and the WTO:
Table of Contents and Introduction," June 19, 2006.
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This collection provides the reader access to the economics literature analyzing the accommodation of labor interests within the WTO. We first develop an understanding of the interaction between global goods, capital and labor markets and the national government institutions that regulate their function. In selecting papers for this volume, we have attempted to identify the most important contributions to the debate. Additional related readings are also discussed and listed in the bibliography.

In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. Recently, private firms and individuals in developing
countries borrow substantially from foreign lenders. It is not clear whether the observed
increase in private sector borrowing leads to overborrowing and frequent defaults by
governments in developing countries. In this paper, we develop a tractable quantitative
model in which private agents decide how much to borrow but the government decides
whether to default. The model with decentralized borrowing increases aggregate credit
costs and sovereign default risk, and reduces aggregate welfare, relative to a model with
centralized borrowing. Private agents do not internalize the effect of their borrowing
on economy-wide credit costs and thus would like to borrow more than the socially
efficient level. Depending on the severity of default penalties, decentralized borrowing
may lead to either too much or too little debt in equilibrium. The introduction of
decentralized borrowing substantially improves the model's empirical fit in terms of
matching observed debt levels and default rates.

595. Yi, Kei-Mu and Jing Zhang, "Structural Change in an Open Economy," April 5, 2010.
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We develop a tractable, three-sector model to study structural change in an open
economy. The model features an endogenous pattern of trade dictated by comparative
advantage. We derive an intuitive expression linking sectoral employment shares to
sectoral expenditure shares and to sectoral net export shares of total GDP. Changes in
productivity and in trade barriers affect expenditure and net export shares, and thus,
employment shares, across sectors. We show how these driving forces can generate the
"hump" pattern that characterizes the manufacturing employment share as a country
develops, even when manufacturing is the sector with the highest productivity growth.

Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic
risk. There is little evidence, however, that countries have increased risk sharing despite recent
widespread financial liberalization. This work shows that the key to understanding this puzzling observation
is that conventional wisdom assumes frictionless international financial markets, while actual
international financial markets are far from frictionless. In particular, financial contracts are incomplete
and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and
more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance
the most. Thus, default risk of debt contracts hinders international risk sharing. When countries
remove their official capital controls, default risk is still present as an implicit barrier to capital flows;
the observed increase in capital flows under financial liberalization is in fact too limited to improve risk
sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and
international risk sharing would increase substantially.

The structure of sovereign debt has evolved over time from illiquid bank loans toward liquid bonds
that are traded on the secondary market in the past two decades. This change in the debt structure
is accompanied with a reduction in the duration of sovereign debt renegotiation; it takes on average 9
years to restructure bank loans, but only 1 year to restructure bonds. In this work, we argue that the
secondary market plays an important role -- information revelation -- in reducing the renegotiation
length. We construct a dynamic bargaining game between the government and the creditors with private
information on the creditors' reservation value. The government uses costly delays as a screening device
for the creditors' type, and so the delays arise in equilibrium. Moreover, the more severe is the private
information, the longer the delays are. When we introduce the secondary market, the equilibrium delays
are greatly reduced. This is because the secondary market price conveys information about the creditors'
reservation and lessens the information friction. We also find that bond financing is more friendly to the
debtor country; it increases ex-ante borrowing and investment and ex-post renegotiation welfare of the government.

One of the most striking aspects of the recent recession is the collapse in international trade. This
paper uses disaggregated quarterly and monthly data on U.S. imports and exports to shed light
on the anatomy of this collapse. We find that the recent reduction in trade relative to overall
economic activity is far larger than in previous downturns. Information on quantities and prices
of both domestic absorption and imports reveals a more than 50% shortfall in imports, relative
to what would be predicted by a simple import demand relationship. In a sample of imports
and exports disaggregated at the 6-digit NAICS level, we find that sectors used as intermediate
inputs experienced significantly higher percentage reductions in both imports and exports. We
also find support for compositional effects: sectors with larger reductions in domestic output
had larger drops in trade. By contrast, we find no support for the hypothesis that trade credit
played a role in the recent trade collapse.

Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of macroeconomic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade in which the parameters are calibrated to match the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- vanishes. The extensive margin of imports accounts for only about 3.5% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, inframarginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in entry barriers are an order of magnitude larger, while the gains from trade liberalization are an order of magnitude smaller.

This paper examines the recent upsurge in foreign acquisitions of U.S. firms, specifically focusing
on acquisitions made by firms located in emerging markets. Neoclassical theory predicts that, on net,
capital should flow from countries that are capital-abundant to countries that are capital-scarce. Yet
increasingly emerging market firms are acquiring assets in developed countries. Using transaction-specific
acquisition data and firm-level accounting data we evaluate the post-acquisition performance of publicly
traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2007.
Our empirical methodology uses a difference-in-differences approach combined with propensity score
matching to create an appropriate control group of non-acquired firms. The results suggest that emerging
country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets
and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years
following the acquisition, sales and employment decline while profitability rises, suggesting significant
restructuring of the target firms.

589. Deardorff, Alan V., "Economic Effects of 'Leveling the Playing Field' in International Trade," July 9, 2009; Journal of International Trade and Economic Development, 19(1), March 2010, pp. 9-32.
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This paper uses simple economic theory to examine the effects of various policies that are
intended to level the playing field in international trade. That is, when foreign producers are
given advantages over domestic producers by government subsidies or other interventions that
lower their costs, domestic firms may argue that their own governments should either provide
comparable assistance or should protect them from competing with the foreign firms on grounds
of fairness. Economic analysis easily shows that granting these requests is usually harmful for
the domestic economy as a whole, but that may not prevent such policies from being
implemented. Therefore this paper examines what the further effects of such policies may be.
The main conclusion that emerges is that policies to level the playing field most often
overcompensate those who request them, making them better off than if the playing field had not
be tilted against them in the first place.

During the period 1991-93, Finland experienced the deepest economic downturn in an
industrialized country since the 1930s. We argue that the culprit behind this Great
Depression was the collapse of Finnish trade with the Soviet Union, because it
induced a costly restructuring of the manufacturing sector and a sudden, large
increase in the cost of energy. We develop and calibrate a multi-sector dynamic
general equilibrium model with labor market frictions, and show that the collapse of
Soviet-Finnish trade can explain key features of Finland’s Great Depression. We also
show that Finland’s Great Depression mirrors the macroeconomic dynamics of the
transition economies of Eastern Europe. These economies experienced a similar trade
collapse. However, as a western democracy with developed capital markets and
institutions, Finland faced none of the large institutional adjustments that other
transition economies experienced. Thus, by studying the Finnish experience we
isolate the adjustment costs due solely to the collapse of Soviet trade.

587. Stern, Robert M., "Trade in Financial Services—Has the IMF Been Involved Constructively?" IEO Background Paper, Independent Evaluation Office of the International Monetary Fund, June 5, 2009. Link to Full IMF Report.
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This paper considers the key policy issues related to liberalization of trade in financial services that the
IMF should be concerned with, and the role the IMF has played in advising on policies related to trade
in financial services in its bilateral and multilateral surveillance and conditionality attached to lending
programs. IMF staff were generally aware of the literature and country experiences showing the
benefits of financial liberalization. But Fund advice in support of liberalization can be best interpreted to
be in support of country unilateral policy actions and the dynamics of the WTO accession process.

586. Stern, Robert M., Gavin Wright, and Hugh Patrick, "Introduction and Overview" to Volumes I and II, The Japanese Economy in Retrospect: Selected Papers by Gary R. Saxonhouse February, 2009; to be published by World Scientific.
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Gary R. Saxonhouse died November 30, 2006 in Seattle, WA, where he was being treated for leukemia. To honor his many accomplishments and writings on the Japanese economy and given our longstanding relationships with him, Hugh Patrick of Columbia University, Gavin Wright of Stanford University, and I decided to assemble the best of his many writings for publication. The selection of his published papers that comprises these two volumes is a testimony and tribute to his lifetime of work and influence that were cut short by his untimely death.

This paper proposes a new channel through which international trade affects macroeconomic volatility.
We study a multi-country model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks.
When the distribution of firm size follows a power law with exponent sufficiently close to -1, the idiosyncratic shocks to large ﬁrms have an impact on aggregate volatility.
Opening to trade increases the importance of large ﬁrms to the economy,
thus raising macroeconomic volatility.
We next explore the quantitative properties of the model
calibrated to data for the 50 largest economies in the world. Our simulation exercise shows
that the contribution of trade to aggregate ﬂuctuations depends strongly on country size: in
an economy such as the U.S., that accounts for one-third of world GDP, international trade
increases volatility by about 3.5%. By contrast, trade increases aggregate volatility by some
30% in a small open economy, such as Belgium or Poland. The model performs well in matching
the elasticity of macroeconomic volatility with respect to country size observed in cross-country
data.

Previous studies of trade and the environment overwhelmingly focus on
how trade affects where goods are produced. However, trade also affects
where goods are consumed. In this paper we describe a model of trade
with durable goods and non‚Äêhomothetic preferences. In autarky, used
goods are relatively inexpensive in high‚Äêincome countries and free trade
causes these goods to be exported to low‚Äêincome countries. We then
evaluate the environmental consequences of this pattern of trade using
evidence from the North American Free Trade Agreement. Since trade
restrictions were eliminated in 2005, over 2.5 million used cars have been
exported from the United States to Mexico. Using a unique, vehicle‚Äêlevel
dataset, we find that traded vehicles are dirtier than the stock of vehicles
in the United States and cleaner than the stock in Mexico, so trade leads
average vehicle emissions to decrease in both countries. Total greenhouse
gas emissions increase, primarily because trade gives new life to vehicles
that otherwise would have been scrapped.

Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, we test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms‚Äô efforts to raise their capability (innovate) by upgrading their technology or the quality of their product/service, taking into account firm heterogeneity. We find competition has a negative effect on innovation, especially for firms further from the frontier, and that the supply chain of multinational enterprises and international trade are important channels for domestic firm innovation. We do not find support for the inverted U effect of competition on innovation. There is weak evidence that firms in a more pro-business environment invest more in innovation and are more likely to display the inverted U relationship between competition and innovation.

582. Koyota, Kozo, Margit Molnar, and Robert M. Stern,"Storm in a Spaghetti Bowl: FTA's and the BRIICS," December 8, 2008.
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In this study we analyze the welfare and sectoral effects of a variety of options for the formation of free trade agreements by several major emerging market economies. The economies covered include: Brazil, Russia, India, Indonesia, China, and South Africa (BRIICS). The analysis is carried out using the Michigan Model of World Production and Trade, which is a multi-country, multi-sectoral computational general equilibrium (CGE) model of the global trading system. The version of the model that we use includes 31 countries/regions plus the rest-of-world and 27 sectors in each country/region. The unique feature of our study is that we have analyzed the simultaneous removal of trade barriers for the BRIICS countries with a variety of FTA partners. The computational results presented thus reflect both the direct effects of the bilateral FTAs and the effects of the other FTAs assumed to be undertaken. The computational results suggest that the welfare effects of the different FTA options are for the most part fairly small in absolute terms and as a percentage of GDP. We compare the FTA results with assumed adoption of unilateral free trade by the individual BRIICS nations and global (multilateral) free trade by all of the countries/regions covered in the Michigan Model. These calculations suggest that the welfare benefits of global (multilateral) free trade are much greater than the benefits to be derived from the various FTAs for the BRIICS countries that we have analyzed and from the assumed unilateral free trade for these countries.

It has been suggested that countries whose exports are in especially risky sectors will experience
higher output volatility. This paper develops a measure of the riskiness of a country's pattern
of export specialization, and illustrates its features across countries and over time. The exercise
reveals large cross-country dierences in the risk content of exports. This measure is strongly
correlated with the volatility of terms-of-trade, total exports, and output, but does not exhibit a
close relationship to the level of income, overall trade openness, or other country characteristics.
We then propose an explanation for what determines the risk content of exports, based on the
theoretical literature exemplied by Turnovsky (1974). Countries with a comparative advantage
in safe sectors or a strong enough comparative advantage in risky sectors will specialize, whereas
countries whose comparative advantage in risky sectors is not too strong will diversify their
export structure to insure against export income risk. We use both non-parametric and semiparametric
techniques to demonstrate that these theoretical predictions are strongly supported
by the data.

A well established empirical result is that countries that trade more with each other exhibit
higher business cycle correlation. This paper examines the mechanisms underlying this rela-
tionship using a large cross-country industry-level panel dataset of manufacturing production
and trade. We show that higher bilateral trade in an individual sector increases both the co-
movement within the sector between trading countries, as well as the comovement between that
sector and the rest of the economy of the trading partner. We also demonstrate that vertical
linkages in production are an important force behind the overall impact of trade on business
cycle synchronization. The elasticity of comovement with respect to bilateral trade is signi-
cantly higher in industry pairs that use each other as intermediate inputs in production. Our
estimates imply that vertical production linkages account for some 30% of the total impact of
bilateral trade on business cycle correlation for our full country sample. Finally, the positive im-
pact of trade on industry-level comovement is far more pronounced in the North-North country
pairs compared to either the South-South or North-South country pairs. However, the relative
contribution of vertical linkages to aggregate comovement is roughly three times greater for
North-South trade than North-North trade.

This paper analyzes the impact of international trade on the quality of institu-
tions, such as contract enforcement, property rights, or investor protection. It presents
a model in which institutional dierences play two roles: they create rents for some
parties within the economy, and they are a source of comparative advantage in trade.
Institutional quality is determined in a Grossman-Helpman type lobbying game. When
countries share the same technology, there is a \race to the top" in institutional qual-
ity: irrespective of country characteristics, both trade partners are forced to improve
institutions after opening. On the other hand, domestic institutions will not improve in
either trading partner when one of the countries has a strong enough technological com-
parative advantage in the good that relies on institutions. We test these predictions in a
sample of 141 countries, by extending the geography-based methodology of Frankel and
Romer (1999). Countries whose exogenous geographical characteristics predispose them
to exporting in institutionally intensive sectors enjoy signicantly higher institutional
quality.

In this study, we use the Michigan Model of World Production and Trade to analyze the economic welfare effects of APEC free trade, unilateral free trade for individual APEC members, and global free trade for all countries/regions covered in the Michigan Model. The Michigan Model is a multi-country, multi-sectoral computational general equilibrium (CGE) model of the global trading system. The version of the model used includes 31 countries/regions plus the rest-of-world and 27 sectors in each country/region. Nineteen APEC members are covered. The computational results suggest that APEC free trade would result in sizable increases in the economic welfare of the individual APEC members in both absolute terms and as a percentage of GDP. There would be trade diversion effects for non-APEC countries, except for the Rest of Middle East. Unilateral free trade for the APEC members would result in larger welfare gains as compared to APEC free trade for 7 of the 19 APEC members. The welfare benefits of APEC free trade are thus larger for more APEC members than unilateral free trade. Finally, global (multilateral) free trade by all of the countries/regions covered in the Michigan Model suggests much larger benefits for all APEC members compared to APEC free trade and APEC unilateral free trade. While global free trade is a limiting case, the computational results presented are testimony to the significant welfare benefits that could be realized from successful pursuit of future multilateral trade liberalization.

We first discuss what fairness may mean in the context of the dispute settlement process,
noting the crucial relation between fairness in dispute settlement and the functioning of
the trading system as a whole. We explore this relation further through an analysis of
three main groups of dispute settlement cases. These are: cases that turn around the
question of defining fair competition; cases that arise from the use of contingency
measures; and cases that draw the boundaries between domestic regulatory measures and
the trade-related norms and rules of the WTO. There follows an analysis of experience
with compliance and with the use of counter measures in various cases. Finally, taking
together the rulings of the Dispute Settlement Body and the procedures for compliance
and the use of counter measures, we conclude that while the present dispute settlement
process serves to protect the fairness of the trading system as a whole, there are some
aspects of dispute settlement that remain problematic from the standpoint of fairness.

Are U.S. exports different from China√≠s exports? If so, how? This paper
attempts to answer this question, focusing on the quality, variety, and overlap
of their products. Using product-level manufacturing import data from Japan,
I find that the exports of China and the United States are similar in terms of
variety. More than 85 percent of U.S. export products to Japan are commonly
exported from China. However, U.S. exports are different from China√≠s exports
in terms of quality. A comparison with the European Union (EU) shows
that U.S. exports are similar to EU exports in terms of both quality and variety
when compared to China√≠s exports. These results suggest that quality
matters. Both the EU and the United States are better endowed with the factors
needed to produce quality or are relatively more productive in producing
quality products than China.

575. Morrow, Peter M., "East is East and West is West: A Ricardian-Heckscher-Ohlin Model of Comparative Advantage," January 8, 2008.
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Models of comparative advantage are usually based either on differences in factor abundance
or differences in total factor productivity within a country despite considerable empirical evidence
that both matter. This paper articulates a unified and tractable model in which comparative
advantage exists due to differences in factor abundance and relative productivity differences
across a continuum of industries with monopolistic competition and increasing returns to scale.
I provide evidence that both sources of comparative advantage shape international production
patterns. In addition, I find that relative productivity differences across industries are uncorrelated
with the factor intensities of these industries. Therefore, each of the two forces for
comparative advantage offers valid partial descriptions of the data. Consequently, simply aggregating
the predictions of the factor abundance-based and relative productivity-based models can
be used to obtain a full description of industry-by-industry production patterns.

In this paper we review the theory of trade and development that Ragnar Nurkse suggested in his Wicksell Lectures of 1959, interpreting it in the light of subsequent advances in the theories and empirics of trade and growth. We then examine the extent to which developing countries√≠ growth experiences during the second half of the 20th century have matched Nurkse√≠s expectations, and also the extent to which his policy advice was followed and, where followed, successful. Perhaps not surprisingly, given the limited information he had available when he wrote, the growth performance of countries following various development strategies has turned out to differ rather markedly from Nurkse√≠s expectations. But his expectations for the policies that would be used, both by the majority of developing countries in the first decades after he wrote, and also by developed countries in response to those few who followed a more export oriented path, were remarkably prescient.

This paper studies how the degree of contract enforcement in a country influences firms√≠
financing decisions. We first document empirical facts on debt financing for two new firm-level
datasets in the United Kingdom and Ecuador. In the United Kingdom, small firms borrow
more relative to their assets than large firms, whereas in Ecuador small firms borrow less. We
build a dynamic model of firms√≠ debt financing where debt is constrained by the likelihood
of default, which varies across firms and economies with different degrees of enforcement.
Because of their low firm values, small firms are mostly affected by abundance or scarcity
of economy-wide loans generated by weak or strong contract enforcement. We calibrate our
model to the datasets in the two countries and find that our mechanism can quantitatively
account for the patterns observed in the data.

572. Kiyota, Kozo, "Paths of Development and Wage Variations," revised November, 2008 (initial working paper version November, 2007); in Review of International Economics, 19(4): 697-717, September 2011.
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In analyzing the relationship between factor endowments and sectoral percapita
output (the path of development), Schott (2003) showed empirically
that the number of cones was neither one nor three but two, and that all countries
fall into one of these two cones. This is a puzzle because it is inconsistent
with large wage variations across economies. This paper attempts to solve this
puzzle, introducing complete and incomplete specialization into a multiplecone
model. Empirical results reveal that factor endowments can explain
Heckscher-Ohlin specialization and the wage variations across economies at
the same time once the multiple-cone model allows the complete specialization.

I first discuss the Doha Round impasse and how this impasse has been created. I next
discuss the trade interests of the industrialized and developing countries and
thereafter the structure of WTO negotiations. I conclude with a discussion of the
policy options for the industrialized and developing countries and the implications for
future WTO multilateral negotiations.

This paper builds on the analysis of Kiyota and Stern (2007) of the economic effects of a Korea-
U.S. free trade agreement (KORUSFTA). We review the objectives and main features of the
KORUSFTA as perceived prior to the negotiation of the agreement and then outline the main
features of the actual KORUSFTA that was concluded at the end of June 2007 and is now
awaiting legislative approval by the authorities in both nations. We summarize the results of a
modeling study by the USITC (2007) that is based on the changes in bilateral tariffs and tariff rate
quotas (TRQs) that were actually negotiated in the KORUSFTA. We also present for comparative
purposes our earlier results from Kiyota and Stern (2007) that used the pre-negotiations data and
some specially constructed estimates of services barriers. Finally, we presents some calculations
of the effects of alternative negotiating options that may be considered especially if it turns out
that the KORUSFTA is not approved by either or both Korea and the United States.

This paper traces the evolution of the global trading system from the 19th century to the present-day GATT/WTO arrangements, calling attention to the key roles of reciprocity and non-discrimination and taking note of how the system is now challenged by the new paradigm of global market integration. The main features of the WTO are described, the boundaries of the WTO identified, and how the expansion of these boundaries may result in the over-extension and weakening of the effectiveness of the WTO.

The Doha Round of Multilateral Trade Negotiations within the World Trade Organization has reached an impasse from which it may never recover. Policymakers in Korea, as in other countries, must decide how to deal with this failure and what policies to pursue in its stead. Here I discuss some of the options, ranging from abandoning the WTO disciplines and raising tariffs, to unilateral reduction of tariffs to zero. Much of the discussion concerns the formation of bilateral or regional free trade agreements, which should be structured to avoid some of their less desirable features.

This paper examines the impact of multinational firms√≠ increasingly blurred geographical and institutional boundaries on the nature and definition of Corporate Social Responsibility (CSR). It begins with a brief history of CSR, describes changes in the global corporation and the pressures impinging on it over the past 25 years, and analyzes the resulting mismatch between the contemporary corporation and traditional concepts of CSR. It then dissects some of the issues raised by this new concept of CSR, and speculates on future trajectories for CSR in multinational corporations as globalization continues to exert pressure for convergence of national standards into a more universal definition of Global CSR.

566. Stern, Robert M., "A Review of Charan Devereaux, Robert Lawrence, and Michael D. Watkins, Case Studies in US Trade Negotiation: Making the Rules and Resolving Disputes," Journal of Economic Literature, March 2008, forthcoming.
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Case Studies in US Trade Negotiation: Making the Rules, Vol. 1, and Resolving Disputes, Vol 2, by Charan Devereaux, Robert Lawrence, and Michael D. Watkins (Peter G. Peterson Institute for International Economics 2006), are outstanding contributions that provide a magnificent depth of understanding of how U.S. trade policies and related initiatives are designed, negotiated, and implemented and how issues of dispute settlement of concern to the United States in the World Trade Organization (WTO) have been addressed and the efforts that have been made in seeking their resolution.

This paper focuses on issues of financial sector liberalization in Ethiopia, with reference
in particular to the Ethiopian banking sector. We identify two factors that may constrain
Ethiopia√≠s financial development. One is the closed nature of the Ethiopian financial
sector in which there are no foreign banks, a non-competitive market structure, and
strong capital controls in place. The other is the dominant role of state-owned banks.
Our observations suggest that the Ethiopian economy would benefit from financial
sector liberalization, especially from the entry of foreign banks and the associated
privatization of state-owned banks.

The Ricardian Model describes a world in which goods are competitively produced from a single factor of production, labor, using constant-returns-to-scale technologies that differ across countries and goods. With only two goods and two countries, the standard textbook model shows that countries will export the good in which they have comparative advantage. Equilibrium takes two forms, one with both countries completely specialized and gaining from trade, the other with one country producing both goods and neither gaining nor losing from trade. The model is easily extended to more than two goods or more than two countries, but not both. Important extensions have been provided by Dornbusch, Fischer, and Samuelson (1977) to a continuum of goods with two countries, and by Eaton and Kortum (2002) to a continuum of goods with many countries and random technologies.

This paper examines the determinants of the backward vertical linkages of Japanese foreign affiliates in
manufacturing for the period 1994-2000, focusing on the local backward linkages, or local procurements
in the host country. Our major findings are twofold. First, the unobserved affiliate-specific characteristics
explain the large part of the variation of the backward linkages among foreign affiliates. Second, the
experience of the affiliate has positive and sometimes non-linear impacts on local procurements for the
affiliates, especially in Southeast Asia and China.

This paper studies the effects of demand and supply shocks in the global crude oil
market on several measures of countries√≠ external balance, including the oil trade balance, the
non-oil trade balance, the current account and changes in net foreign assets (NFA) during 1975√±
2004. We explicitly take a multilateral and global perspective. In addition to the United States,
the Euro area and Japan, we consider a number of regional aggregates including oil-exporting
economies and middle-income oil-importing economies. Our first result is that the effect of oil
shocks on the merchandise trade balance and the current account, which depending on the source
of the shock can be large, depends critically on the response of the non-oil trade balance, and
differs systematically between the United States and other oil importing countries. Second, using
the Lane-Milesi-Ferretti NFA data set, we document the presence of large and systematic (if not
always statistically significant) valuation effects in response to oil shocks, not only for the
United States, but also for other oil-importing economies and for oil exporters. Our estimates
suggest that increased international financial integration will tend to cushion the effect of oil
shocks on NFA positions for major oil exporters and for the United States, but may amplify it for
other oil importers.

Intervention operations are used by governments to manage their exchange rates but officials rarely confirm their presence in the market, leading inevitably to erroneous reports in the financial press. There are also reports of what we term, unrequited interventions, interventions that the market expects but do not materialize. In this paper we examine the effects of various types of intervention news on intra-day exchange rate behavior. We find that unrequited interventions have a statistically significant influence on returns, volatility and order flow, suggesting that the expectation of intervention, even when governments do not intervene, can affect currency values.

560. Kiyota, Kozo and Shujiro Urata, "The Role of Multinational Firms in International Trade:
The Case of Japan," February 2007; Japan and the World Economy, 20(3): 338-352, August 2008.
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This paper examines the role of multinational firms in international trade using firm-level
panel data for Japanese firms between 1994 and 2000. Our results indicate that
multinational firms dominate Japanese trade. In 2000, only 12.4 percent of Japanese firms
were multinationals but they accounted for 93.6 and 81.2 percent of Japanese exports and
imports, respectively. We found that multinational firms emerged from being
exporters/importers. These results imply that firms do not make the choice of either
exporting or undertaking FDI, contrary to the findings of previous studies. Rather, exporters
make a decision on whether or not to undertake FDI.

559. Deardorff, Alan V. and Robert M. Stern "What Should the Developing Countries Do in the Context of the Current Impasse of the Doha Round?," February 20, 2007.
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If the Doha Round of multilateral trade negotiations fails, the biggest losers will be developing countries. In this paper we argue why this is the case and examine various options that may be available to developing countries either to avert or to deal with this failure.

558. Brown, Andrew G. and Robert M. Stern "What Are the Issues in Using Trade Agreements for
Improving International Labor Standards?," revised July 23, 2007; World Trade Review, March 2008, forthcoming.
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This paper addresses the issues of whether the linking of core labor standards with multilateral or bilateral trade agreements is an effective way of promoting the improvement of labor standards. We review the determinants of core labor standards over time and conclude that efforts to improve these standards have to be tailored to the economic and social circumstances prevailing in a country at a specific time. Legalistic means to prod governments into revising their domestic laws or enforcing them will therefore be unsuccessful unless economic incentives can be changed to erode prevailing social norms and ease the way for the acceptance of new norms that will meet with public approval and be consonant with the distribution of political power. Moral suasion from both domestic and external sources may work more slowly than more legalistic means but is preferred because it contributes to altering the social norms that underlie and will reinforce the acceptance and effectiveness of labor standards.

This study presents an analysis of the bilateral free trade agreement
(FTA) that is being negotiated between Korea and the United States.
The bilateral FTA negotiations were notified to the U.S. Congress by
the United States Trade Representative in February 2006, and formal
negotiations began in May 2006.1 It is anticipated that the negotiations
may be completed and the agreement signed before mid-2007, which is
when the current U.S. presidential negotiating authority expires. Once
signed, the implementing legislation can be introduced in the U.S.
Congress at any time.

In Chapter 1, we set out what appear to be the primary objectives of
the United States and Korea in their pursuit of an FTA. In Chapter 2, we
review the existing studies of a Korea-U.S. FTA that have been done to
date. Chapter 3 is devoted to comparative static and dynamic analyses
of the FTA. We first provide an overview of the features and benchmark
data of the Michigan Model of World Production and Trade, which is the
computational general equilibrium (CGE) modeling framework that we
use to analyze the economic effects of a Korea-U.S. FTA. Thereafter, we
present the comparative static modeling results for the bilateral removal
of tariffs and other trade barriers for agricultural products, manufactures,
services, and all of these combined. This is followed by presentation
of results of some dynamic computational scenarios that are specially
constructed to take into account possible changes in capital formation
that may be generated by the Korea-U.S. FTA. We then draw together
the main conclusions from the review of previous studies and our own
computational work.

In Chapter 4, we provide a broader perspective on a Korea-U.S.
FTA that takes into account alternative negotiating options for the two
nations. These options include computational analyses of the other FTAs
that each nation has concluded in recent years and that are currently in
process. We also calculate the potential effects of the unilateral removal
of trade barriers by the United States and Korea and the effects of global
free trade in which all countries or regions covered in the model are assumed
to remove their existing trade barriers on a multilateral basis. In
Chapter 5, we present conclusions and implications for further research
and policy.

556. Kiyota, Kozo, "On Testing the Law of Comparative Advantage," January 15, 2008. Published as "A Test of the Law of Comparative Advantage, Revisited," Review of World Economics / Weltwirtschaftliches Archiv, 147(4): 771-778, November 2011.
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This paper reconsiders the law of comparative advantage (Deardorff, 1980,
1994) from an empirical point of view. I show that not only net exports valued
at autarky prices but also those valued at free trade prices are needed to test
the law of comparative advantage when trade is not balanced. This result
brings into question the empirical success of the test of comparative advantage
that Bernhofen and Brown (2004) have applied to Japan. I propose a more
general test that is consistent with both balanced and unbalanced trade and
apply it to Japan. The law of comparative advantage does not necessarily
hold in Japan once trade imbalance is taken into account.

Previous studies of job creation and job destruction (JCJD) have found that the gross job
reallocation rate greatly exceeded the net job creation rate even in a narrowly defined
industry or the same international trade orientation. This paper asks whether multinational
enterprises (MNEs) reflect different patterns of JCJD compared to domestic firms. We
distinguish two types of MNEs (i.e., Japanese MNEs and foreign-owned firms) and utilize
firm-level data in Japan for 1995-2002. We find that the gross job reallocation rate may be
equal to the net job creation rate once we control for the entry/exit, industry, worker type,
and multinational status. Multinational status is important in explaining the heterogeneity
of employment patterns among firms.

In this paper, we first describe the characteristics of the World Trade Organization (WTO) that are the basis of the framework of the multilateral trading system. We then provide an overview of concepts of fairness in trade agreements. Thereafter, we offer a critique of the efficiency criterion in assessing multilateral trade agreements, taking issue with T.N. Srinivasan√≠s (2006) analysis and then elaborate on our conception of fairness as reflected in agreements covering market access. We also address considerations of distributive justice, in contrast with Srinivasan√≠s contention that distributive justice has no role to play in the design and negotiation of multilateral trade agreements. Finally, we question bilateral trade agreements from the standpoint of fairness, drawing on the example of the U.S. bilateral FTA negotiated in 2005 with Central America and the Dominican Republic.

The spread of the HIV/AIDS epidemic is still fueled by ignorance in many parts of the world. Filling
in knowledge gaps, particularly between men and women, is considered key to preventing future
infections and to reducing female vulnerabilities to the disease. However, such knowledge is
arguably only a necessary condition for targeting these objectives. In this paper, we describe the
extent to which HIV/AIDS knowledge is correlated with less risky sexual behavior. We ask: even
when there are no substantial knowledge gaps between men and women, do we still observe
sex-specific differentials in sexual behavior that would increase vulnerability to infection? We use
data from two recent household surveys in Botswana to address this question. We show that even
when men and women have very similar types of knowledge, they have different probabilities of
reporting safe sex. Our findings are consistent with the existence of non-informational barriers to
behavioral change, some of which appear to be sex-specific. The descriptive exercise in this paper
suggests that it may be overly optimistic to hope for reductions in risky behavior through the channel
of HIV-information provision alone.

We define productivity growth as the change in welfare that arises from additional output holding
primary inputs constant. Using this traditional growth-accounting definition, we show that gains may
arise because of plant-level technology shocks, and, in imperfectly competitive settings, from the
reallocation of inputs across plants with differing markups and/or shadow values of primary inputs.
With plant-level data, the alternative and most popular definition of productivity growth looks at the
difference in the first moments of the productivity distribution. We show that this definition adds
an additional term to the growth-accounting measure, which has been called √¨reallocation.√Æ We
show there is a very weak relationship between the two indexes in almost every 3-digit
manufacturing industry in both Chile from 1987-1996 and Colombia from 1981-1991 - 49 in total -
primarily because this √¨reallocation√Æ term is large and volatile. We explore the theoretical reasons
for this sharp divergence, in the process uncovering a number of previously unnoticed and
unattractive features of the first-moment definition. For example, it is not tethered to any theoretical
model, it is sensitive to measured units, and it can report positive productivity growth when welfare
has fallen.

551. Saxonhouse, Gary R. and Robert M. Stern, "Trade Policy Issues and Policy Options for Japan and the United States: Introduction and Overview," World Economy, June, 2006.
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Empirical studies find substantial differences in demand elasticities and associated markups among
products of different quality. This paper analyzes the theoretical determinants of such variation. We
present a simple model that allows for horizontal and vertical differentiation and accounts for endogenous
entry. We find that most economic forces in our model, such as consumers√≠ price sensitivity, the
scope for product differentiation, and sunk costs of entry, are likely to induce lower equilibrium demand
elasticities for higher quality products. In contrast, other economic forces, such as marginal cost of
production and the distribution (across consumers) of the willingness to pay for quality, may induce
the opposite pattern. These results provide an organizing framework through which empirical findings
may be interpreted, and may also help to predict variation in demand elasticities for markets in which
empirical estimates of elasticities are unavailable or infeasible to obtain.

This paper analyzes firm panel data to examine how export demand shocks associated with the
1997 Asian financial crisis affected Chinese exporters. We construct firm-specific exchange rate
shocks based on the pre-crisis destinations of firms√≠ exports. Because the shocks were
unanticipated and large in magnitude, they are an ideal instrument for identifying the impact of
exporting on firm productivity and other aspects of firm performance. We find that firms whose
export destinations experience greater currency depreciation have slower growth in exports and
that export growth increases firm productivity as well as other measures of firm performance.
Consistent with the √¨learning-by-exporting√Æ hypothesis, greater exports increase the productivity
of firms exporting to developed countries but not of firms exporting via Hong Kong or directly to
poorer destinations.

548. Saxonhouse, Gary R. and Robert M. Stern, "Reversal of Fortune: Macroeconomic Policy,
International Finance, and Banking in Japan," International Economics and Economic Policy, December 2005.
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This paper examines whether the traditional sets of macro surprises, that most of the literature
considers, are the only sorts of news that can explain exchange rate movements. We examine the
intra-daily influence of a broad set of news reports, including variables which are not typically
considered "fundamentals" in the context of standard models of exchange rate determination, and
ask whether they too help predict exchange rate behavior. We also examine whether "news" not only
impacts exchange rates directly, but also influences exchange rates via order flow (signed trade
volume). Our results indicate that along with the standard fundamentals, both non-fundamental news
and order flow matter, suggesting that future models of exchange rate determination ought to include
all three types of explanatory variables.

This paper reexamines the evidence on the border effect, the finding that the border drives a wedge
between domestic and foreign prices. We argue that the border effect can be inflated by the volatility
and persistence of the nominal exchange rate and by the cross-country heterogeneity in the
distribution of within-country price differentials. We develop a simple framework to separate the
border effect from these confounding factors. Using price data from Engel and Rogers (1996) and
Parsley and Wei (2001), we show that after controlling for the confounding factors the border effect
between the U.S. and Canada and the U.S. and Japan is negligible.

This paper analyzes the potential economic effects of bilateral negotiations for an FTA between
the United States and the Southern African Customs Union (SACU). The U.S.-SACU FTA
bilateral negotiations were initiated in June 2003. But following a number of official meetings,
the negotiations were deadlocked over a series of issues of concern to the SACU. The bilateral
FTA negotiations have now been replaced by an effort to negotiate a framework agreement
covering trade and investment issues and possibly a bilateral FTA at some future time.

To determine whether a bilateral FTA might be in the SACU members√≠ interests, we use the
Michigan Model of World Production and Trade to assess the welfare and other economic effects
of a bilateral FTA. For modeling purposes, the focus is on the effects of the bilateral removal of
trade barriers, which lend themselves most readily to quantification. The conclusion is that the
welfare benefits of a bilateral FTA are rather small in both absolute and relative terms, and that
the non-trade and dynamic benefits of the SACU FTA are unlikely to alter these results
significantly.

To provide a broader perspective on the potential economic effects of a U.S.-SACU FTA, the
model is also used to calculate the effects of unilateral tariff removal and global free trade. It is
shown that unilateral free trade would result in much larger increases in economic welfare for the
United States and SACU as compared to the FTA bilateral trade liberalization. The effects of
global (multilateral) free trade are shown to be greater for the United States and SACU as
compared to both the bilateral FTA liberalization and unilateral tariff removal. The results
suggest accordingly that the interests of the global trading community, including the United
States and SACU, could be better served by unilateral and especially multilateral liberalization
rather than a bilateral FTA.

How are we to assess the fairness of the global trading system as embodied in the GATT/WTO? Opinions about what constitutes fairness differ widely, and there is surely no incontrovertible yardstick. But can we be clearer about the criteria that are appropriate and what they mean in more operational terms?

In this paper, we first discuss why fairness is a condition of the agreements among governments that form the global trading system. We then suggest that fairness can best be considered within the framework of two concepts: equality of opportunity and distributive equity. We observe that the efficiency criterion is not a primary yardstick of fairness, and though it is relevant in choosing among alternative ways of realizing fairness, it is not without its own limitations. We thereafter discuss what equality of opportunity and distributive equity mean when applied to the commitments that governments make in the global trading system. For this purpose, we divide these commitments into four categories: those relating directly to market access; those concerning supporting rules designed to prevent cheating in market access commitments or to facilitate trade flows; those relating to procedures for the settlement of disputes or the use of trade remedy measures; and those relating to governance of the system. (We say nothing in this paper about the issue of fairness in the context of the last category.) Finally, we make some comments about fairness in the Doha Development Round, first reviewing some proposals made by Stiglitz and Charlton, and then making some observations about the central issue of market access.

This paper discusses the welfare effects, on groups, countries, and the world, of fragmentation. Fragmentation here is defined as the introduction of a technology that permits a production process to be split into separate parts, with the fragments able to be done in different locations. Standard results of trade theory and the gains from trade are then examined to see what they suggest about the gains from fragmentation. The main points made are, first, that it is easy to find examples in which fragmentation hurts particular groups and countries, and even in some circumstances the world. But I also argue that fragmentation is likely to increase world income overall, and therefore that it is likely to be beneficial on average. Based on that, together with our general ignorance of what the more specific effects of fragmentation are likely to be, we should resist attempts to use policies to interfere with it.

This paper explores the implications for trade policy of buyer concentration in markets for primary commodity exports of developing countries. Simple partial equilibrium models of monopsony and oligopsony show that the best available policy for the exporting country may be to tax exports so as to extract some of the profits of the monopsonist, even though doing so actually worsens the distortion caused by the buyer√≠s market power. The paper also explores the general equilibrium implications of these results for factor markets and for patterns of trade.

Throughout the 1990s, the social-market capitalism that prevailed in most of
the larger countries of continental Western Europe and the producer-oriented
or mercantilist capitalism characteristic of Japan and a number of other
large Asian economies were under strong pressures to migrate their economies
toward U.S. (or Anglo-Saxon)-style investor capitalism. This paper explores
whether the pressures for convergence exerted by globalization persisted
into the first decade of the 21st century, after the American "bubble" burst
and the United States fell from grace in a number of economic, social, and
political dimensions.

American-style investor capitalism indeed continues to be the dominant model
where capital markets and corporate governance are concerned. Various
pressures continue to push the labor markets of industrial nations in that
direction as well, despite strong political and social backlash. Where
relations with customers are concerned, however, it is the requirements
imposed on products, services and production processes by the stringent
regulations of the EU's social market capitalism, and its adherence to the
precautionary principle, that dominate. At the same time, U.S.-style
capitalism is itself evolving as its participants struggle to restore public
trust and to integrate the adaptability and market-responsiveness of its
institutions with a broadened focus on corporate responsibility to multiple
stakeholders.

As tariffs and quotas have fallen substantially during successive rounds of
multilateral trade negotiations, attention has increasingly focused on
harmonizing a variety of "domestic" policies that limit or distort
international trade and investment, such as intellectual property
protection, environmental rules, labor standards, and competition
(antitrust) policies. An increase in such "deep integration" or "system
convergence" would indeed maximize global welfare as regards transactions in
private goods, but it also undermines the ability of sovereign states to
respond to their own voters' preferences as regards such public goods as
inflation and unemployment rates, national defense, income distribution,
environmental quality, and worker protection. The resulting tensions have
made the negotiation of multilateral trade agreements and regional
integration arrangements more complex and difficult and the resistance to
them more pronounced.

A century has passed since the Government of Canada adopted the first recorded antidumping law in 1904. The Canadian legislation was soon followed by similar legislation in most of the major trading nations in the industrialized world prior to and after World War I. Antidumping provisions were later incorporated into the General Agreement on Tariffs and Trade (GATT) following World War II. Nowadays, virtually all of the industrialized and developing countries in the world economy have adopted antidumping legislation. In view of the long and increasingly widespread use of antidumping measures, we marked the centennial of Canada√≠s 1904 legislation with a symposium at the University of Michigan on March 12, 2004. The symposium papers document the experiences with antidumping and then ask whether and how antidumping can be reformed. Although we all would probably agree that the best solution would be to retract all antidumping legislation, this is unlikely to happen in the foreseeable future. Antidumping laws serve a variety of purposes, and powerful political forces stand in the way of eliminating these laws. Antidumping provides a stronger and more focused means of safeguards protection against surges of imports than GATT-legal safeguards laws permit. Antidumping also formalizes a meaning for √¨unfair trade√Æ that, though essentially meaningless from an economic standpoint, strikes a chord in public perception. And finally, in spite of its appearance of being constrained by objective administrative rules, antidumping in practice is a potent political tool that governments are able to manipulate in order to satisfy powerful constituents. With all this going for it, antidumping is unlikely ever to be relinquished as an economic policy tool by governments.

This paper reviews the theoretical development of the concept of comparative advantage, starting with the two-good model of Ricardo and the two-good extension and reinterpretation by Haberler. In both, the presence of comparative advantage provides the scope for countries to gain from trade by specializing, and the pattern of that trade is explained by the pattern of comparative advantage. These strong results of the two-good model can be extended under certain circumstances to multiple goods and countries, but under more general assumptions such strong results no longer are assured. Instead one can derive much weaker results, usually in the form of correlations between comparative advantage and trade, and these weaker results hold in a much wider variety of circumstances. The paper examines those assumptions that permit such generalizations, but then also examines when those assumptions are most likely to fail, and what happens as a result.

536. Leibbrandt, Murray, James Levinsohn, and Justin McCrary, "Incomes in South Africa since the Fall of Apartheid," May 12, 2005.
ABSPDF

This paper examines changes in individual real incomes in South Africa between 1995
and 2000. We document substantial declines√≥on the order of 40%√≥in real incomes for both men
and women. The brunt of the income decline appears to have been shouldered by the young and the
non-White. We argue that changes in respondent attributes are insufficient to explain this decline.
For most groups, a (conservative) correction for selection into income recipiency explains some,
but not all, of the income decline. For other groups, selection is a potential explanation for the
income decline. Perhaps the most persuasive explanation of the evidence is substantial economic
restructuring of the South African economy in which wages are not bid up to keep pace with price
changes due to a differentially slack labor market.

Do remittances sent by overseas migrants serve as insurance for recipient households?
This paper examines how remittances sent by overseas migrants respond to income
shocks experienced by Philippine households. Because household income and
remittances are jointly determined, we exploit rainfall shocks as instrumental variables
for income changes. In households with overseas migrants, we find that exogenous
changes in income lead to changes in remittances of the opposite sign, consistent with an
insurance motivation for remittances. In such households, we cannot reject the null
hypothesis of full insurance: on average, essentially all of exogenous declines in income
are replaced by remittance inflows from overseas. By contrast, changes in household
income have no effect on remittance receipts in households without overseas migrants.
Remittance receipts may also be partly shared with others: in migrant households, net
gifts to other households move in the same direction as remittance receipts in response to
income shocks.

534. Yang, Dean, "Coping With Disaster: The Impact of Hurricanes on International Financial Flows,
1970-2001," March 2005.
ABSPDF

How well do countries cope with the aftermath of natural disasters? In particular, how
well do international financial flows buffer economic losses from disasters? This paper
focuses on hurricanes (one of the most common and destructive types of disasters), and
examines the impact of hurricane damages on resource flows to affected countries. Due
to the potential endogeneity of disaster damage, I exploit instrumental variables
constructed from meteorological data on hurricanes. Instrumental variables estimates
indicate that disaster damages lead to increases in national-level net inflows of migrants√≠
remittances, foreign lending, and foreign direct investment. These types of flows respond
rapidly, within the first year after damages. Official development assistance (ODA) also
responds positively to hurricane damage, but with a lag of roughly two years. On
average, total inflows from these sources within the following four years amount to
roughly four-fifths of estimated damages. The null hypothesis of full insurance of
hurricane disaster damages cannot be rejected. By contrast, ordinary least squares
estimates find essentially no response of international flows to disaster damages,
highlighting the importance of an instrumental variables approach in this context.

Cross-listed shares may confound government efforts to control capital outflows by providing a legal means through which investors can transfer their wealth outside the country. We study the recent experience of investors in Argentina and Venezuela who while subject to capital controls, were able to purchase cross-listed shares using local currency, convert the shares into dollar-denominated shares, re-sell them in New York and deposit the dollar proceeds in U.S. bank accounts. We show that capital controls drive a wedge between the price of local shares and their corresponding cross-listed shares. This anomalous wedge provides a measure of the market√≠s implicit devaluation forecast and the value of capital control circumvention. We also find that the imposition of controls in Argentina led to changes in the underlying pricing structure of cross-listed shares in Buenos Aires and New York.

This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets √± one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime√≠s credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus √±either a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales.

Millions of households in developing countries receive financial support from family
members working overseas. How do the economic prospects of overseas migrants affect
origin-household investments√≥in particular, in child human capital and household
enterprises? This paper examines Philippine households√≠ responses to overseas members√≠
economic shocks. Overseas Filipinos work in dozens of foreign countries, which
experienced sudden (and heterogeneous) changes in exchange rates due to the 1997 Asian
financial crisis. Appreciation of a migrant√≠s currency against the Philippine peso leads to
increases in household remittances received from overseas. The estimated elasticity of
Philippine-peso remittances with respect to the Philippine/foreign exchange rate is 0.60.
In addition, these positive income shocks lead to enhanced human capital accumulation
and entrepreneurship in origin households. Favorable migrant shocks lead to greater child
schooling, reduced child labor, and increased educational expenditure in origin
households. More favorable exchange rate shocks also raise hours worked in selfemployment,
and lead to greater entry into relatively capital-intensive enterprises by
migrants√≠ origin households.

530. Stern, Robert M., "The Place of Services in the World Economy," February 15, 2005; Colombian Economic Journal, 2006 (3); reprinted in ICFAI Professional Reference Book√±Knowlege Management in the Services Sector, ICFAI University Press, Hyderabad, India, forthcoming.
ABSPDF

This paper emphasizes the key roles that services play domestically and internationally in terms of accounting for rising shares of domestic output and employment as well as cross-border trade and foreign direct investment that provide enhanced export opportunities and lower-cost imports. Services are commonly subject to a variety of regulatory policies, such that liberalization requires both the removal of explicit barriers combined with regulatory reform. There is substantial evidence indicating that services liberalization and regulatory reform may result in increased economic growth and greater efficiency in the use of labor and capital, increased product innovation, and increased consumer welfare.

The role of services is put in context by a review of selected economic data on the trade and macroeconomic structure and performance especially of the five Andean economies √± Bolivia, Colombia, Ecuador, Peru, and Venezuela. The implications of regulatory reform and services liberalization are analyzed in some depth, after which there is a focus on methods of measurement of international services barriers and quantification of the economic significance of reducing or removing these barriers. The potential economic benefits of services liberalization are illustrated computationally. The paper concludes with a discussion of priorities for multilateral services negotiations.

This paper uses trade theory to examine the effects of trade liberalization on countries that do not participate in it. These include both countries that fail to participate in multilateral trade negotiations, and also countries that lie outside of preferential trading arrangements such as free trade areas. The analysis suggests that, while it is theoretically possible for excluded countries to gain, through improved terms of trade, from trade liberalization, several reasons suggest that they are more likely to lose.

528. Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, "Computational Analysis of the Free Trade Area of the Americas (FTAA)," revised, February 5, 2005; North American Journal of Economics and Finance, August 2005.
ABSPDF

We use the Michigan Model of World Production and Trade to assess the economic effects of the
Free Trade Area of the Americas (FTAA) that is currently being negotiated among the 34
countries in the region. The model covers 18 economic sectors in each of 22 countries/regions
and is based on Version 5.4 of the GTAP database for 1997 together with specially constructed
estimates of services barriers and other data on sectoral employment and numbers of firms. The
distinguishing feature of the model is that it incorporates some aspects of trade with imperfect
competition in the manufacturing and services sectors, including monopolistic competition,
increasing returns, and product variety. The modeling focus is on the effects of the bilateral
removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and
other restrictive measures and the non-trade aspects of the FTAA are not taken into account due
to data constraints. The computational results indicate that the FTAA would increase the
economic welfare of the FTAA member countries by $118.8 billion, with the largest increases
accruing to the United States, $67.6 billion, and to South America, $31.0 billion. The FTAA is
trade diverting for most of the rest-of-world, with a welfare reduction of $9.3 billion. In
comparison, if the FTAA countries were to adopt unilateral free trade, total FTAA member
welfare would increase by $476.8 billion and global welfare by $812.7 billion. If multilateral free
trade were adopted by all countries/regions in the global trading system, the welfare effects would
be considerably larger, $751.2 billion for the FTAA members and $2.7 trillion globally.

527. Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, "Computational Analysis of the U.S FTAs with Central America, Australia, And Morocco," revised January 31, 2005; The World Economy, October 2005.
ABSPDF

We use the Michigan Model of World Production and Trade to assess the economic effects of the
U.S. bilateral FTAs negotiated with Central America, Australia, and Morocco. The model covers
18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP
database for 1997 together with specially constructed estimates of services barriers and other data
on sectoral employment and numbers of firms. The distinguishing feature of the model is that it
incorporates monopolistic competition in the manufacturing and services sectors, including
increasing returns and product variety. The modeling focus is on the effects of the bilateral
removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and
other restrictive measures and the non-trade aspects of the FTAs are not taken into account due to
data constraints. The computational results indicate that the benefits of bilateral FTAs for the
United States and partner countries are rather small in both absolute and relative terms, and that
far greater benefits could be realized if the United States and its FTA partners adopted unilateral
free trade and especially if multilateral free trade was adopted by all countries/regions in the
global trading system.

This paper uses household-level data from Ethiopia to investigate the impact of food aid on the poor. We find that food aid in Ethiopia is "pro-poor." Our results indicate that (i) net buyers of wheat are poorer than net sellers of wheat, (ii) there are more buyers of wheat than sellers of wheat at all levels of income, (iii) the proportion of net sellers is increasing in living standards and (iv) net benefit ratios are higher for poorer households indicating that poorer households benefit proportionately more from a drop in the price of wheat. In light of this evidence, it appears that households at all levels of income benefit from food aid and that - somewhat surprisingly - the benefits go disproportionately to the poorest households.

525. Yang, Dean, "Integrity for Hire: An Analysis of a Widespread Program for Combating Customs
Corruption," January 2005.
ABSPDF

Can governments successfully combat bureaucratic corruption by √¨hiring integrity√Æ from
the private sector? This paper examines the impact of hiring private firms to collect information
for government anti-corruption efforts. In the past two decades, a number of developing countries
have hired private firms to conduct preshipment inspections of imports, generating data that
governments can use to fight corruption in customs agencies. I find that countries implementing
such inspection programs subsequently experience large increases in the growth rate of import
duties, by 6 to 8 percentage points annually. By contrast, the growth rate of other tax revenues
does not change appreciably. Additional evidence suggests that declines in customs corruption
are behind the import duty improvements: the programs also lead to increases in imports
(potentially reflecting lower bribe payments) and to declines in mis-reporting of goods
classifications. Historically, this hired integrity appears to have been cost-effective: accumulated
improvements in import duty collections in the fifth year of a typical inspection program were
roughly 5 times accumulated costs.

In the absence of distortionary tax and spending policies, freer immigration and trade for a country
would often be supported by similar groups thanks to similar impacts on labor income. But
government policies that redistribute income may alter the distributional politics. In particular,
immigrants may pay taxes and receive public services. Imports, obviously, can do neither of these.
This suggests quite different political coalitions may organize around trade and immigration. In this
paper we develop a framework for examining how pre-tax and post-tax cleavages may differ across
globalization strategies and also fiscal jurisdictions. We then apply this framework to the case of
individual immigration and trade preferences across U.S. states. We have two main findings. First,
high exposure to immigrant fiscal pressures reduces support for freer immigration among natives,
especially the more-skilled. Second, there is no public-finance variation in opinion over trade policy,
consistent with the data that U.S. trade policy has negligible fiscal-policy impacts. Public-finance
concerns appear to be crucial in shaping opinions towards alternative globalization strategies.

523. Levinsohn, James, "Globalization and the Returns to Speaking English in South Africa," October 29, 2004.
ABSPDF

This paper takes a novel approach to trying to disentangle the impact of globalization on
wages by focusing on how the return to speaking English, the international language of commerce,
changed as South Africa re-integrated with the global economy after 1993. The paper finds that
the return to speaking English increased overall and that within racial groups the return increased
primarily for Whites but not for Blacks.

522. Burstein, Ariel, Christopher Johann Kurz, and Linda Tesar, "Trade, Production Sharing and the International Transmission of Business Cycles," November 2004.
ABSPDF

This paper is motivated by three observations about the link between international
trade and international business cycle synchronization: (1) a large increase in trade in
manufactures over the last 30 years, (2) a larger fraction of trade between core and
periphery regions relative to core regions is in the form of production sharing, (3) crosscountry
output correlations have increased between core and periphery regions relative
to core regions. We examine to what extent these observations can be reconciled in a
multi-country version of a standard model of international business cycles. Production
sharing is captured in a simple way as trade in intermediate inputs that are complements
in production. We find that the model is successful qualitatively in account for
these observations. Quantitatively, we find that the direct effects from trade do not
generate large divergence in output correlations across countries. We extend the model
to allow for cost reduction spillovers from MNEs in the core country to their affiliates
in the periphery. This mechanism increases the impact that product sharing has on
output correlations between core and peripheral countries.

521. Deardorff, Alan V. and Robert M. Stern, "Designing a Pro-Active Stance for India in the Doha Development Agenda Negotiations," October 13, 2004.
ABSPDF

In this paper, we first summarize the framework that has been agreed upon as the basis for the WTO Doha Development Agenda (DDA) negotiations. We then discuss briefly the design and mission of the WTO and the economic effects of multilateral trade liberalization. Thereafter, we discuss the conditions for India√≠s realization of the maximum benefits from the DDA negotiations and the implications for broader Indian domestic policy reforms. We then set out our recommendations for India√≠s pro-active involvement and negotiating strategies in the DDA negotiations for multilateral trade liberalization in agricultural products, manufactures, and services, and for improvements in WTO rules governing trade and related issues. We conclude with a brief discussion of the policy agenda adopted by India√≠s newly elected coalition parties, the implications of the emphasis on social reform and equity for India√≠s negotiating strategies in the DDA negotiations, and a vision of the role that India might play in the global trading system and in world politics.

520. Yang, Dean, "Can Enforcement Backfire? Crime Displacement in the Context of Customs Reform in the
Philippines," September 2004.
ABSPDF

Increased enforcement can lead crime to be displaced to alternative lawbreaking
methods. In theory, crime displacement should respond positively to the size of profits
threatened by enforcement. If enforcement displaces crime towards lawbreaking methods
with lower variable costs, the overall crime rate need not fall. This paper examines a
customs reform in the Philippines that raised enforcement against a specific method of
avoiding import duties. The reform constituted a quasi-experiment: the increased
enforcement applied only to shipments from a subset of countries, so that corresponding
shipments from all other countries serve as a comparison group. Increased enforcement
reduced the targeted method of duty avoidance, but led to substantial displacement to an
alternative duty-avoidance method (shipping via duty-exempt export processing zones),
amounting to 2.7 percent of total imports from treatment countries. The hypothesis that
the reform led to zero change in total duty avoidance cannot be rejected. Displacement
was greater for products with higher tariff rates and import volumes, consistent with the
existence of fixed costs of switching to alternative duty-avoidance methods.

Recent concern has attended the phenomenon of skilled-labor outsourcing, in which firms in the U.S. and other advanced countries have drawn upon the services of skilled workers in developing countries for activities that they used to do at home. Motivated by this and the fact that such outsourcing would be hard to explain without technological differences, this paper explores theoretically a simple story of outsourcing in which factor proportions and technology interact across activities performed within industries or firms. The model has a single sector in which a final output is produced from two activities that differ in their intensity of use of skilled and unskilled labor. In one activity, the developed world (North) has a technical advantage. In the other it does not, but a new regime makes it possible to outsource it to the developing world (South). The paper shows that this outsourcing, if the countries continue to diversify, causes the wage of unskilled labor in North to fall below that in South. However, if factor endowments differ enough to lead to specialization, then it becomes possible for both factors in North to gain.

In this paper, we first trace the evolution of the global trading system from the 19th century to the present-day GATT/WTO arrangements, calling attention to the key roles of reciprocity and non-discrimination, and we note how the system is now challenged by the new paradigm of global market integration. We then consider the recent plethora of free trade agreements (FTAs), including those between industrial and developing countries, and their uneasy relationship with a multilateral system based on non-discrimination.. Thereafter, we seek to identify the boundaries of the WTO and examine how the potential expansion of these boundaries may result in the over-extension and weakening of the effectiveness and influence of the WTO.

In this paper I argue that profit maximizing firms, even though they contribute to social welfare when they compete in the market, may not do so when they influence the political process. In particular, I suggest, through several examples from both the real world and from economic theory, that corporations have played a significant role in the formulation of the rules of the international trading system. They did this in the formation of the WTO, where they were responsible for the expansion to cover both intellectual property and services. And they do this in preferential trading arrangements such as the NAFTA, where they inserted the notorious Chapter 11 and specified rules of origin for automotive products. All of this is quite consistent with economic theory, including the literature on the political economy of trade policy. I also use a simple duopoly model to illustrate a domestic firm√≠s interest in setting rules of origin. The corporate influence on rules need not be bad, but there is no reason why it should be good either, as these examples illustrate.

If trade costs matter for trade, and if distance matters for at least some trade costs, then location matters for trade. This may be especially important for Japan, given its distance from other developed countries and proximity to a number of developing countries. In this paper I explore the relationship between location and trade in a simple partial equilibrium model of a single homogeneous good that may be produced and traded by three countries located on a plane. Six equilibrium regimes arise in this model, depending on trade costs compared to differences in autarky prices. These range from complete autarky in which no country trades, through partial autarky in which only two of the three countries trade, to either of two integrated equilibria in which either two countries export to the third, or (a different) two countries import from the third. I first identify these regimes in terms of the parameter values, including trade costs, that are needed for their occurrence. I then map them on the plane where the three countries are located.

Results include the following: For a country whose autarky price lies between those of the other countries, whether it will export or import the good depends on its proximity to the other countries. It will export the good if it is close to the high-cost country, import it if it is close to the low-cost country, and not trade it at all if it is too far from both. The location of such a country is also important for the trade of the other countries. For example, the lowest cost country may not be able to trade at all if the intermediate-cost country, by virtue of its location, takes away the market of the high-cost country. Finally, although a fall in trade costs increases, up to a point, the geographic scope for a country to trade, beyond that point it cannot make trade possible for an intermediate-cost country that is too remote to trade.

I apply this model in a very stylized way to the position of Japan, noted above. It suggests that Japan, with factor endowments similar to other developed countries but located closer to many developing countries, should dominate trade with its developing-country neighbors.

515. Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, "Computational Analysis of the Menu of U.S.-Japan Trade Policies," August 6, 2004; The World Economy, June 2006, pp. 805-55.
ABSPDF

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production
and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of U.S.-Japan trade policies. The menu of policies encompasses the various preferential U.S. and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers by the two countries, and global (multilateral) free trade. The U.S. preferential agreements include the FTAs approved by the U.S. Congress with Chile and Singapore in 2003, those signed with Central America, Australia, and Morocco and awaiting Congressional approval in 2004, and prospective FTAs with the Southern African Customs Union (SACU), Thailand, and the Free Trade Area of the Americas (FTAA). The Japanese preferential agreements include the bilateral FTA with Singapore signed in 2002 and prospective FTAs with Chile, Indonesia, Korea, Malaysia, Mexico, Philippines, and Thailand. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small in the United States and Japan, but vary across the individual sectors depending on the patterns of the bilateral liberalization.
The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. Data limitations precluded analysis of the welfare effects of the different FTA rules of origin and other discriminatory arrangements.

In comparison to the welfare gains from the U.S. and Japan bilateral FTAs, the gains from both unilateral trade liberalization by the United States, Japan, and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. and Japan FTAs are based on "hub" and "spoke" arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.

We use the Michigan Model of World Production and Trade to assess the economic effects of the
U.S. FTA being negotiated with the Southern African Customs Union (SACU). The model covers
18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP
database for 1997 together with specially constructed estimates of services barriers and other data
on sectoral employment and numbers of firms. The distinguishing feature of the model is that it
incorporates monopolistic competition in the manufacturing and services sectors, including
increasing returns and product variety. The modeling focus is on the effects of the bilateral
removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and
other restrictive measures and the non-trade aspects of the U.S.-SACU FTA are not taken into
account due to data constraints. The computational results indicate that the benefits of the
bilateral FTA for the United States and the SACU are rather small in both absolute and relative
terms. Far greater benefits could be realized if the United States and the SACU adopted
unilateral free trade and especially if multilateral free trade was adopted by all countries/regions
in the global trading system.

Why would migrant workers in rich countries ever return to poorer countries of
origin? In a model of migration and household investment, with borrowing constraints
and minimum investment thresholds, return migration occurs for either target-earnings or
life-cycle reasons. This paper exploits a unique quasi-experiment to distinguish between
these potential explanations for return migration. I examine how the return decisions of
Philippine migrants respond to major and unexpected exchange rate shocks (due to the
1997 Asian financial crisis). Overall, the evidence favors the life-cycle explanation: more
favorable exchange rate shocks lead to fewer migrant returns. A 10% improvement in the
exchange rate reduces the 12-month return rate by 1.4 percentage points. However, there
is evidence that some migrants are motivated by target-earnings considerations: for
households with intermediate levels of foreign earnings, more favorable exchange rate
shocks have the least effect on return migration, but lead to increases in entrepreneurial
income, real property purchases, and vehicle ownership. Overall, the findings are at odds
with a model with relaxed constraints on borrowing for household investment.

512. Deardorff, Alan V. and Robert M. Stern, "Enhancing the Benefits for India and Other Developing Countries in the Doha Development Agenda Negotiations," July 16, 2004.
ABSPDF

The Doha Round of multilateral trade negotiations in the World Trade Organization (WTO) has been billed from the start as the √¨Doha Development Agenda,√Æ with the promise in the Doha Ministerial Declaration to √¨place [developing countries√≠] needs and interests at the heart of the Work Programme adopted in this Declaration.√Æ The reason for this emphasis was in part the perception that previous rounds had neglected the interests of developing countries or, in the case of the Uruguay Round, had brought developing countries on board with promises that were misleading or not likely to be kept. The collapse of the September 2003 Cancun Ministerial Meeting reinforced the need to address the interests of developing countries, and recent agreements reached at the WTO in Geneva suggest that the Doha negotiations may now be on track. What is now important to emphasize, as the negotiations get under way, is to follow through with actions that are designed to fulfill the special needs of developing countries and to address their problems in implementing these actions.

In our paper we lay out what we believe to be the most important actions that could be taken in the Doha Round for the benefit of developing countries, including India. We base these suggestions primarily on the understanding of the economics of international trade that has been developed over the last two centuries and is widely taught in the universities of the world, and also on the research in recent years dealing with specific aspects of trade negotiations in general and of the Doha Round in particular. With regard to the interests of developing countries generally, we provide recommendations for WTO decision-making, agricultural policies, market access, intellectual property, services, the Singapore issues, technical assistance, and special treatment. Each of these recommendations is accompanied by brief arguments in support. The paper then goes on to review several more specific policy and negotiating recommendations focused on India.

It is essential that India and other developing countries participate actively and constructively in the Doha negotiations to further their own interests. They cannot rely on the best-intentioned developed countries to do this for them, since the developed countries will inevitably find themselves making compromises in favor of their own interests and in response to powerful pressures from their domestic constituents. Many developing countries are at a disadvantage in the negotiating process, due to their resource limitations, and in many cases due also to their inexperience in negotiations. Offsetting these disadvantages, however, are their large numbers and the compelling case that can be made for meeting their needs. What the developing countries need is leadership and cooperation, which India is well suited to provide. What is also needed is a willingness to listen and be flexible on the part of their developed country counterparts.

When firms from developed markets acquire firms in emerging markets, marketcapitalization-
weighted monthly joint returns show a statistically significant increase
of 1.8%. Panel data estimations suggest that the value gains from cross-border M&A
transactions stem from the transfer of majority control from emerging-market targets
to developed market acquirers√≥joint returns range from 5.8% to 7.8% when majority
control is acquired. Announcement returns for acquirer and target firms estimate the
distribution of gains and show a statistically significant increase of 2.4% and 6.9%,
respectively. The evidence suggests that the stock market anticipates significant value
creation from cross-border transactions that involve emerging-market targets leading
to substantial gains for shareholders of both acquirer and target firms.

This paper utilizes micro-panel data for firms located in Japan and examines differences in static and dynamic
corporate performance between foreign-owned and domestically-owned firms in the 1990s. We find that
foreign-owned firms not only reflect superior static characteristics but also achieve faster growth. In addition,
foreign investors appear to invest in firms that may not be immediately profitable now but those that are potentially
the most profitable in the future. The results imply that foreign investors bring useful firm-specific assets into the
Japanese market, which may work as an effective catalyst for necessary structural reform.

This paper evaluates how much of the economics profession has evaluated the evidence on the
relationship between international trade and economic growth. The paper highlights the basic
approaches to the trade and growth question that the literature has adopted. The case is made that
more attention needs to be paid to the mechanisms by which trade impacts growth and that future
research should move away from a focus on outcomes and look instead at these mechanisms.

508. Mendoza, Enrique G. and Linda L. Tesar, "Winners and Losers of Tax Competition in the European Union," July 2003; forthcoming in Macroeconomic Policies in the World Economy, Kiel Institute for World Economics.
ABSPDF

This paper quantifies the macroeconomic effects of capital income tax competition in the European Union using a two-country neoclassical dynamic general equilibrium model. This model incorporates three key externalities of tax competition: the relative price externality, the wealth distribution externality and the fiscal solvency externality. We consider tax strategies limited to the class of time-invariant taxes and allow governments to issue debt to smooth the tax burden. The analysis starts from a pre-tax-competition equilibrium calibrated to represent the United Kingdom and Continental Europe (France, Germany and Italy) using data from the early 1980s, just before the European integration of financial markets. When labor taxes adjust to maintain fiscal solvency, competition does not trigger a √¨race to the bottom√Æ in capital taxes. The UK makes a large welfare gain and cuts its capital tax. Continental Europe increases both labor and capital taxes and suffers a large welfare loss. These results are consistent with evidence showing that over the last two decades the UK lowered its capital tax, while Continental Europe increased both capital and labor taxes. When consumption taxes adjust to maintain fiscal solvency, there is a √¨race to the bottom√Æ in capital taxes but both the UK and Continental Europe are better off than in the pre-tax-competition equilibrium. The gains from coordination in all of these experiments are trivial.

Theory predicts that strategically-determined tax rates induce negative externalities across countries in relative prices, the wealth distribution and tax revenue. This paper studies the interaction of these externalities in a dynamic, general equilibrium environment and its effects on quantitative outcomes of tax competition in one-shot games over capital income taxes between two governments that set time-invariant taxes and issue debt. Strategic payoffs correspond to welfare gains net of the cost of transitional dynamics in a standard neoclassical two-country model with exogenous balanced growth. The model is calibrated to European data for the early 1980s starting from a benchmark with symmetric countries. When countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency, the Nash equilibrium replicates calibrated taxes, suggesting that European taxes can be the outcome of Nash competition. When consumption taxes are adjusted to maintain fiscal solvency, competition triggers a √¨race to the bottom√Æ in capital taxes but this outcome is welfare-improving relative to calibrated taxes. Sensitivity analysis shows that competition can produce a √¨race to the top√Æ in capital taxes and that the United Kingdom can benefit from tax competition with Continental Europe. Surprisingly, the gains from coordination in all of these experiments are small.

This paper examines dollar interventions by the G3 since 1989, and the reasons that trader reactions to these interventions might differ over time and across central banks. Market microstructure theory provides a framework for understanding the process by which sterilized central bank interventions are observed and interpreted by traders, and how this process in turn, might influence exchange rates. Using intra-daily and daily exchange-rate and intervention data, the paper analyzes the influence of interventions on exchange-rate volatility, finding evidence of both within day and daily impact effects, but little evidence that interventions influence longer term volatility.

505. Deardorff, Alan V. and Robert M. Stern, "Empirical Analysis
of Barriers to International Services Transactions and the Consequences of Liberalization," teaching module prepared for a World Bank course on Trade In Services And International Trade Agreements: The Development Dimension, January 2, 2004; in Aaditya Mattoo, Robert M. Stern, and Gianni Zanini (eds.), International Trade in Services A Handbook, Palgrave Macmillan and The World Bank, forthcoming; adapted for publication in Philippa Dee and Michael Ferrantino (eds.), Quantitative Methods for Assessing the Effects of Non-Tariff Measures and Trade Facilitation, World Scientific, 2005; also adapted for inclusion in J.R. Bryson, J.R. and P.W. Daniels (eds.), The Service Industries Handbook, Cheltenham: Elgar, forthcoming.
ABSPDF

The procompetitive effects of trade policies are analyzed in a foreign duopoly model of vertical product differentiation. A uniform tariff policy complying with the Most Favored Nation (MFN) clause is welfare superior to free trade because of a pure rent-extracting effect. A nonuniform tariff policy yields an even higher level of social welfare because of procompetitive effects. The optimal policy is sensitive to firms√≠ cost asymmetries: if these are high, imports of low quality are subsidized and imports of high quality face a tariff; otherwise, both imports face a tariff. Regional Trade Agreements (RTAs) are examples of such nonuniform tariff policies. They yield higher welfare than free trade because they are procompetitive; moreover, a RTA with a low-quality producing country yields larger gains than a RTA with a high-quality producing country because the former enables the importer to extract foreign rents.

503. Helg, Rodolfo and Lucia Tajoli, "Patterns of International Fragmentation of Production
and Implications for the Labor Markets," January, 2004. North American Journal of Economics and Finance, forthcoming.
ABSPDF

Growing shares of international trade flows consist of intermediate and unfinished goods shipped from one country to another to combine manufacturing or services activities at home with those performed abroad. This configuration of the productive structure has been named √¨internationally fragmented√Æ. The purpose of our work is to analyze the labor market effects of international fragmentation of production in Europe, looking at how it affects relative labor demand. Models of trade due to fragmentation of production suggest that when international fragmentation takes place we can expect to observe a change in the relative factor intensities of the affected industries. We use international trade data specifically related to international fragmentation of production to test if the shift in intensity of skilled and unskilled labor employed in Italy and Germany during the 1990s it related to the fragmentation activity.

502. Coleman, Andrew, "Storage, Slow Transport, and the Law of One Price:
Evidence from the Nineteenth Century U.S. Corn Market," February, 2004.
ABSPDF

This paper develops a rational expectations model of physical arbitrage incorporating storage and
trade to explain how markets are integrated when trade is costly and non-instantaneous. The
paper finds a striking empirical verification of the model from an analysis of the late nineteenth
century corn markets in Chicago and New York. The dataset is particularly high quality and
includes weekly data on spot and future prices, storage quantities and the cost of three modes of
transport for a fourteen year period. In keeping with the model, it is shown that the New York
spot price frequently exceeded both the New York futures price and the Chicago spot price plus
the transport cost by several percent when inventories in New York were low, but not when they
were high. The paper also derives a supply of storage curve for New York corn and argues it can
be explained as the outcome of rational arbitrage when transport is slow.

This paper examines the role of comparative advantage in a Ricardian trade model with intermediate inputs. The first issue is how to define comparative advantage when there are intermediate inputs. Several definitions are suggested, differing in whether they are based on the total costs of producing goods, on the one hand, or on the labor requirements per dollar of value added, on the other; and differing also √± since both approaches require prices of intermediate inputs √± in the choice of prices for making these comparisons. Standard √¨predictions√Æ of trade patterns in terms of comparative advantage are easily derived, but using the value-added definition and actual prices that prevail with trade. These have the usual implications for patterns of specialization based on rankings, or √¨chains,√Æ of comparative advantage. However, because these prices are not given and may depend on barriers to trade, these comparisons are less informative than in Ricardian models with only final goods. In fact, trade patterns here can be so sensitive to trade costs that any such comparison predicting the trade in particular goods fails to be robust. In spite of this, the gains from trade are unambiguous in these Ricardian models, with imported inputs actually providing an additional source of gain from trade. Also, a weaker statement of the Law of Comparative Advantage, using only a correlation or average relationship between relative autarky prices and trade, is also valid under weaker assumptions than in more general models.

When there are costs of trade, such as transport or other costs, the pattern of trade may not be well described by the usual measures of comparative advantage, which simply compare a country√≠s costs or autarky prices to those of the world. Instead, a better comparison takes into account the costs of trade. This paper shows first, in an example, how trade patterns can vary with costs of trade. It then provides restatements of the Law of Comparative Advantage, first in a Ricardian model with trade costs. It then extends a result from Deardorff (1980) and Dixit and Norman (1980) to include trade costs explicitly in a more general framework. It uses this result to derive two correlations that relate trade patterns to measures of comparative advantage that take account of both autarky prices and the costs of trade. Finally, it examines the solution to a trade model with product differentiation in order to make the potential role of trade costs more explicit, both algebraically and graphically. With product differentiation either by country or by firm, net trade in an industry, both bilaterally and globally, depends on a country√≠s costs of both production and trade relative to an index of those costs for other countries.

This policy brief takes the position that international labor standards should not be incorporated into the WTO and other trade agreements as we argue that this will not achieve either of the two professed goals: a) improving the wages and working conditions of workers in poor countries and b) keeping more jobs in the industrialized countries. In fact, empirical evidence shows that such mandates can reduce the number of workers with better working conditions and increase the number in poorer conditions, hence creating further inequality. The literature also shows that low labor standards do not provide developing countries with an unfair advantage in their export trade nor do they drive FDI. We recommend alternative policies be deployed through existing institutions. For the poor countries, sustainable improvement of the wages and working conditions of workers can only be achieved through solid economic and social development policies, deployed with the assistance of international organizations (regional banks, NGOs, etc). For the industrialized countries, we recommend that more effort be focused on preparing workers to be able to adapt to the evolving global economy. The process of economic change is complex and cannot be managed by mandates. The alternative policies we propose will be far more effective in making workers and the economies better off.

498. Deardorff, Alan V. and Robert M. Stern, "Enhancing the Benefits for Developing Countries in the Doha Development Agenda Negotiations," August 13, 2003.
ABSPDF

This is a position paper dealing with the major issues of the Doha Round negotiations that are of importance for developing countries. It was prepared for circulation prior to the Cancun Ministerial Meeting of the WTO. It provides recommendations for WTO decision making, agricultural policies, market access, intellectual property, services, the Singapore issues, technical assistance, and special treatment. These are accompanied by brief arguments in support of these recommendations.

497. Deardorff, Alan V., "Michigan's Stake in International Trade and Investment," September 23, 2002. Published in Ballard, Courant, Drake, Fisher, and Gerber, eds., Michigan at the Millennium: A Benchmark and Analysis of Its Fiscal and Economic Structure, East Lansing, MI: Michigan State University Press, 2003, pp. 101-116.
ABSPDF

This paper provides descriptive data on the interactions of the economy of the State of Michigan with the rest of the world outside the United States. Most of the focus is on international trade and investment, with specific attention to Michigan's exports and the foreign ownership of establishments in Michigan. For both of these, data are presented on the size of these international transactions by value and by employment, comparison of these with other states, their industry composition, and their foreign-country composition. It is noted that Michigan is one of the largest exporting states in the nation, with the largest share of these exports being in the transportation equipment industry, and with most of these exports destined for Canada and Mexico. Foreign ownership is also important in Michigan, although not as important as trade.

There is a wide disparity of views on issues of international labor standards. Labor and social activists are concerned about the increased imports from countries in which labor standards are ostensibly not enforced at a sufficiently high level. They fear that these imports will be detrimental to wages and employment conditions in the industrialized importing countries and that workers in the developing countries will be exploited, their wages suppressed, and that they will be subjected to abusive work conditions. This paper explores these different views and the available options for addressing the issues involved. The paper begins with the definition and scope of labor standards and then turns to theoretical aspects of the economic effects of labor standards and a summarizes the empirical evidence on the effects on wages, trade, and foreign direct investment, and the role of interest groups. Global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards are discussed and implications for policy presented.

In this paper we discuss the various aspects of the Doha Round of Multilateral Trade Negotiations in the
WTO that offer potential benefits for developing countries. We then use the Michigan Model of World
Production and Trade to simulate the economic effects on the major trading countries/regions of the
reductions in tariffs, subsidies in agriculture, and barriers in services that may be negotiated in the Doha
Round, as well as a variety of regional free trade agreements (FTAs). We estimate that an assumed
reduction of post-Uruguay Round tariffs and other barriers on agricultural and industrial products and
services by 33 percent in the Doha Round would increase world welfare by $686.4 billion, with
significant gains for all industrialized and developing countries/regions.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA
would increase global and member country welfare, but by much less than the Doha multilateral trade
round. There would also be trade diversion and detrimental welfare effects on some nonmember
countries for the FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore
considerably greater than the gains from preferential trading arrangements and more uniformly positive
for all countries.

494. Okubo, Toshihiro, "The Border Effect in the Japanese Market: A Gravity Model Analysis," April 16, 2003. Forthcoming in Journal of the Japanese and International Economies.
ABSPDF

This paper uses a Gravity Model to analyze the border effect in the Japanese market, which
indicates how biased interregional trade is compared with international trade. The results
suggest that the border effect in Japan is much lower than in the United States and Canada,
and has declined year by year between 1960 and 1990. Possible reasons for the decline
include the reduction of tariff rates and non-tariff barriers, the surge of foreign direct
investment, and the appreciation of the yen.

493. Hallak, Juan Carlos, "The Effect of Cross-Country Differences
in Product Quality on the Direction of International Trade 2002," February, 2003.
ABSPDF

Despite considerable theoretical work predicting that product quality plays an important
role in determining the direction of international trade, there is no empirical evidence on the
existence and magnitude of such a quality e.ect on trade. In this paper, I provide a framework to
estimate the impact of cross-country di.erences in product quality on bilateral trade flows. The
model allows countries to di.er both in the quality of goods they produce and in their aggregate
demand for quality. It also takes into account other determinants of international trade, such
as di.erences in factor proportions. I estimate the model using cross-sectional data on bilateral
trade flows at the sectoral level. The empirical results confirm the theoretical prediction: rich
countries import relatively more from countries that produce high-quality goods. Even though
traditional determinants of comparative advantage are still the main driving force of trade,
quality di.erences between countries have a significant e.ect on the pattern of international
trade flows.

Critics of globalization object to many things, some of which can be easily understood within standard economic models, but others of which seem to reflect a view of the world that economists generally do not share. This paper attempts to identify several alternative frameworks for analysis within which some of their criticisms may be understood, with the ultimate aim of extracting testable implications that differ from standard models. Three such alternative models are suggested, all of which focus mainly on the behavior of owners and managers of corporate capital: an anti-labor model, in which capitalists are willing to sacrifice some of their own profits for the chance to make labor worse off; a labor-monopsony model in which capitalists cooperate globally to increase profits by depressing wages; and an international political economy model in which capitalists use their resources to influence the political process for more than just obtaining import protection. This third framework, which is not spelled out in any detail here, has capitalists seeking policies such as export subsidies and other means of promoting market access, and it also has them influencing the international negotiations that set the rules of international agreements and organizations, such as the NAFTA and WTO. Examples of the latter sort of influence are discussed.

491. Fukao, Kyoji, Toshihiro Okubo, and Robert M. Stern, "An Econometric Analysis of Trade Diversion under NAFTA," October 30, 2002; North American Journal of Economics and Finance, December 2002.
ABSPDF

We provide an econometric analysis of whether or not the tariff preferences extended to Canada and Mexico under NAFTA may have resulted in trade diversion. A review of previous studies, both descriptive and econometric, suggests that trade diversion has occurred especially as evidenced by Mexico's increased shares of U.S. imports apparently at the expense of several Asian countries. We use a conceptual framework based on a partial-equilibrium model of differentiated product industries under monopolistic competition for many countries. The model is implemented empirically using a fixed-effect panel analysis of U.S. imports at the Harmonized System (HS) 2-digit level for the period, 1992-98. Of the 70 sets of regressions that were run, the coefficients of the tariff rates were statistically significant in 15 cases. The strongest evidence of trade diversion was found mainly for U.S. imports of textile and apparel products. We also estimated regressions for selected commodities at the HS 4-digit level. The results suggest trade diversion for textiles, apparel, and some footwear products but not for trade in motor cars and vehicles and television receivers, which may have been more influenced by changes in foreign direct investment and outsourcing rather than tariff preferences.

490. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"Multilateral, Regional, and Bilateral Trade-Policy Options for the United States
and Japan," December 16, 2002. The World Economy 26(6), June 2003, pp. 803-828.
ABSPDF

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of the Doha Round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 percent in the Doha Round would increase world welfare by $686.4 billion, with gains of $164.0 billion for the United States, $132.6 billion for Japan, and significant gains for all other industrialized and developing countries/regions. If there were global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would increase by $2.1 trillion, with gains of $497.0 billion (5.5 percent of GNP) for the United States and $401.9 billion (6.2 percent of GNP) for Japan.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than the Doha multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile, and Korea and the United States with Chile, Singapore, and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.

489. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"Computational Analysis of Multilateral Trade Liberalization in the Uruguay Round
and Doha Development Round," December 8, 2002; in Aaditya Mattoo and Robert M. Stern, eds., India and the WTO, Washington, D.C.: World Bank and Oxford University Press, 2003, pp. 13-46. ABSPDF

We have used the Michigan Model of World Production and Trade to simulate the economic effects of the Uruguay Round of multilateral trade negotiations completed in 1993-94 on the major industrialized and developing countries/regions. We estimate that the Uruguay Round negotiations increased global economic welfare by $73.0 billion. The developed countries overall have an estimated welfare gain of $53.8 billion, and the developing countries an estimated welfare increase of $19.2 billion.

We have also simulated the effects of assumed 33 percent reductions in trade barriers in the ongoing Doha Development Round. There is an estimated increase in global welfare of $574.0 billion. There is a global welfare decline of $3.1 billion from agricultural liberalization due primarily to the assumed reductions in export subsidies. There are global welfare gains of $163.4 billion from reductions in manufactures tariffs and $413.7 billion from reductions in services barriers. All of the countries/regions covered in the Michigan Model show overall welfare increases, with the largest absolute gains going to the developed countries.

The Heckscher-Ohlin theory links specialization of production to relative factor
endowments. Endowments are the result of accumulation in response to economic in-centives.
Taking this into account allows us to reconcile wildly di¬ßerent predictions
in the empirical literature about the e¬ßect of capital accumulation on manufacturing
output. We estimate the e¬ßect of factor proportions on specialization in a cross-section
of OECD countries. We show that using the estimation results alone, we cannot dis-tinguish
between specialization driven by factor proportions, and specialization that
is correlated with factor proportions for other reasons. But our results are consistent
with evidence on sectoral factor intensities, which supports the H-O theory. Moreover,
our model does a good job of predicting the substantial reallocation that takes place
within manufacturing as countries grow. It explains 2/3 of the observed di¬ßerence in
the pattern of specialization between the poorest and richest OECD countries.

Almost from its inception as the European Economic Community, the European Union has excited the hope if not the expectation that it would generate dynamic gains from trade, including perhaps a permanent increase in the rates of growth of participating countries. This paper examines the empirical evidence relating to this issue and then interprets the economic performance of the EU countries in terms of a simple theoretical model of economic integration with increasing returns to scale. The paper concludes that evidence for increased long-run growth rates of the EU countries is weak, and that what may have happened instead is that countries have benefited asymmetrically from the formation and the later expansion of the EU. Benefits of economic integration appear to accrue - in the form of temporarily higher growth rates leading to higher levels of per capita income - first to large countries and then to some smaller countries that entered the arrangement relatively early.

We present in this paper a description and discussion of the state of scholarly debate on the supply and demand-side determinants of child labor. We first review the theoretical literature and some incidental empirical evidence concerning household decision-making and its implications for work and school choices for children. We then turn to a discussion of the empirical evidence on these and related issues based on survey research of household decision-making. The demand side of child labor is broached next, followed by a more thorough treatment of the rise and fall of child labor during the 19th century. We turn finally to specific issues thought to be important in affecting both the supply and demand for children: the conflicting effects that trade openness has on child labor; the impact of compulsory education laws; and the value of an education and the determinants of education quality.

483. Brown, Drusilla K., Alan V. Deardorff, and Robert M.
Stern, "The Effects of Multinational Production on Wages and Working Conditions
in Developing Countries" August 30, 2002; in Robert E. Baldwin and L. Alan Winters, eds., Challenges to Globalization: Analyzing the Economics, National Bureau of Economic Research, Chicago: University of Chicago Press, 2004, pp. 279-326. ABSPDF

This paper is designed to assess the empirical evidence regarding the effects of multinational production on wages and working conditions in developing countries. It is motivated by the controversies that have
emerged, especially in the past decade or so, concerning whether or not multinational firms in developing countries are exploiting their workers by paying low wages and subjecting them to coercive, abusive,
unhealthy, and unsafe conditions in the workplace. We begin by addressing the efforts and programs of social activist groups and universities and colleges involved in the "Anti-Sweatshop" Campaign in
the United States, the social accountability of multinational firms, and the role of such international insti-tutions as the International Labor Organization and World Trade Organization in dealing with labor
standards and trade. We then consider the conceptual aspects of the effects of foreign direct investment on wages in host countries and the effects of outsourcing, subcontracting, and other forms of fragmenta-tion by multinational firms. We note in particular that available theories yield ambiguous predictions for the effects of multinational production on wages, leaving the effects to be examined empirically. We therefore, in the final section of the paper, review the empirical evidence on multinational firm wages in developing countries, and the relationship between foreign direct investment and labor rights. This evi-dence indicates that multinational firms routinely pay higher wages and provide better working conditions than their local counterparts, and they are typically not attracted preferentially to countries with weak
labor standards.

Analyzing the distributional impacts of economic crises is important and,
unfortunately, an ever more pressing need. If policymakers are to intervene to help those most
adversely impacted, then policymakers need to identify those who have been most harmed and
the magnitude of that harm. Furthermore, policy responses to economic crises typically must be
timely. In this paper, we develop a simple methodology to fill the order and we√≠ve applied our
methodology to analyze the impact of the Indonesian economic crisis on household welfare there.
Using only pre-crisis household information, we estimate the compensating variation for
Indonesian households following the 1997 Asian currency crisis and then explore the results with
flexible non-parametric methods. We find that virtually every household was severely impacted,
although it was the urban poor that fared the worst. The ability of poor rural households to
produce food mitigated the worst consequences of the high inflation. The distributional
consequences are the same whether we allow households to substitute towards relatively cheaper
goods or not. However the geographic location of the household mattered even within urban or
rural areas and household income categories. Additionally, households with young children may
have suffered disproportionately adverse effects.

We test for home-market effects using a difference-in-difference gravity specification. The home-market effect is the tendency for large countries to be net exporters of goods with high transport costs and strong scale economies. It is predicted by models of trade based on increasing returns to scale but not by models of trade based on comparative advantage. In our estimation approach, we select pairs of exporting countries that belong to a common preferential trade area and examine their exports of goods with high transport costs and strong scale economies relative to their exports of goods with low transport costs and weak scale economies. We find that home-market effects exist and that the nature of these effects depends on industry transport costs. For industries with very high transport costs, it is national market size that determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this case, national market size plus market size in nearby countries determine national exports.

Russia's application for accession to the WTO is currently in its final phases and may be completed by the end of 2003. In this context, this paper provides some background information on Russia's recent policy and structural reforms, the composition and geographic distribution of trade, tariff rates by commodity groups, and other aspects of trade and domestic policies at issue in the accession process. The accession proce-dure and the current status of the accession process are then discussed. Using a computable general equilibrium (CGE) modeling analysis of China's WTO accession as a prototype, the potential use of CGE model-ing of Russian accession is considered as well as Russia's participation in the Doha Development Round and preferential trading arrangements. It is concluded that Russia may realize significant benefits from WTO accession and from the multilateral trade liberalization to be effected in the Doha Round.

This paper identifies and measures new goods in the U.S. manufacturing sector in the late 1970s and 1980s, and finds that: (i) The average skilled-labor intensity of new goods exceeds that of old goods by over 40%; (ii) even within 4-digit industries, new goods are slightly more skilled-labor intensive than old goods (by about 4%); (iii) new goods can account for about 30% of the increase in the relative demand for skilled labor. Therefore, new goods help explain the rising skill premium in the U.S. Furthermore, new goods provide a direct measure of technological changes so that this paper provides new evidence that technology has shifted demand in favor of skilled labor and finds that a sizeable "between" component of the rise in the relative demand for skilled labor is due to technology.

This paper examines the effects of new goods on the relative wages of skilled-labor and the pattern of trade in a two-cone Heckscher-Ohlin model and shows that: (i) new goods can be a valid theoretical explanation for the rising skill premium in the U.S. (ii) the outcome depends on both domestic and international factor market effects of the new goods, and the interplay between these two effects gives rise to surprising results; (iii) new goods that are "friendly" to the abundant (scarce) factors move the relative factor prices in the direction of convergence (divergence). The setup is general in the goods dimension so that the introduction of new goods is completely unrestricted, and the results apply to any one or any combination of the relative demand shocks for skilled labor. The results also apply when non-tradable goods are present.

This paper addresses the debate over whether labor standards ought to be linked to trade policy, specifically by being included in the World Trade Organization and becoming subject to trade sanctions. We first try to put the debate into context by reviewing the issues and the events that have led to the current situation. We next turn to the arguments in favor of putting labor standards into the WTO, then address the arguments against doing so. Finally we offer our own advice to developing countries as to the position that they should take in this debate, and how more broadly they should deal with this and other issues in multilateral trade negotiations.

Previous theoretical contributions on endogenous tariff formation have focused on trade mod-els with homogeneous goods and constant returns to scale. This paper investigates the political equilibrium of trade policy when economic structure is instead characterized by differentiated products and increasing returns to scale and there exists intra-industry trade. The result shows that endogenous tariffs are positive for all industries with non-negligible shares of world pro-duction. However, the level of protection is less than the optimal tariff that would otherwise be imposed by a benevolent government in an unorganized industry, and higher in an organized industry. The protection provided to all unorganized (organized) industries increases (falls) with the relative weight the government attaches to aggregate welfare vis-` a-vis campaign contribu-tions and falls with the fraction of the population that belongs to a lobby group. The model also indicates that the endogenous tariff level in an organized industry might be explosive. The higher is the fraction of the population represented by a lobby and the higher is the weight on aggregate welfare in the government√≠s objective function, the smaller is the possibility for such an explosive tariff.

This paper attempts to study the usage of the GATT/WTO dispute settlement mechanism
and to explain its patterns across different regimes and decades, using a unified theoretical model. This study first explores the role of the degree of legal controversy over a panel ruling in determining countries' incentives to block/appeal a panel report under the GATT/WTO regime. The model is able to explain the surge in blocking incidence during the 1980s over the preceding GATT years and the immense frequency at which the new appellate procedure under the WTO is invoked. Furthermore, a two-sided asymmetric information framework is used to study the effects of political power on countries' incentives to use, and interactions in using, the GATT/WTO dispute settlement mechanism. It is shown that the magnitude of the political cost relative to the potential benefit that the complainant stands to gain when using this mechanism determines the pattern of filing activity and the frequency of various procedural outcomes. This result, when confronted with the statistics on disputes in different decades of the GATT regime,
provides us an indicator of how well the dispute procedure has worked during various decades, in terms of how much this procedure has been subject to potential power politics.

There is a growing theoretical and empirical literature concerning the causes and consequences of child labor. The objective of this paper is to evaluate the policy initiatives targeted on child labor in light of the newly emerging theoretical argumentation and empirical evidence. We focus in particular on programs to address child-labor practices, and we attempt to evaluate these programs, given the empirical evidence concerning the primary determinants of when and why children work. Throughout, we find it instructive to evaluate the policies that have been adopted with the intent of reducing overall child labor in terms of the impact they are likely have on the welfare of children.

In this paper I lay out the case, as I see it, for tariffication of services. I argue that the prospects for achieving significant liberalization of the international provision of services will be greatly improved if something like this proposal is followed. By amending the GATS to permit countries to tax foreign providers of services in a manner that is roughly analogous to tariffs on imported goods, countries will be encouraged to bring most categories of services under GATS discipline. Of course, that discipline will be much weakened by doing this, since the taxes may be set so high that little if any trade will occur. However, once this is done, it will become possible for countries to negotiate reductions in these service tariffs in exactly the same way that they have done for goods over the last fifty years. Considering the amount of time it has taken to achieve significant liberalization of trade in goods, we should not expect to achieve it in services any time soon. However, by starting the process with tariffication, we place services upon the same well-traveled road that has been followed before, and we can be more confident that the future negotiating process will take us where we want to go, even if we cannot know how soon we will get there.

472. Saxonhouse, Gary R., "Dispute Settlement at the WTO and
the Dole Commission: USTR Resources and Success" August 2, 2001. In Robert M.
Stern, ed., Issues and Options for U.S.-Japan Trade Policies, University
of Michigan Press, 2002, pp. 363-383. ABSPDF

At the time the Uruguay Round Agreements were passed by Congress, particular concern was expressed about their implications for U.S. national sovereignty. Concern was sufficiently great that the Clinton Administration committed its support to the creation of a commission that would review each adverse decision against the United States by the WTO. The commission was designed such that the outcome of its review process might trigger a serious Congressional consideration of U.S. withdrawal from the WTO.
While the so-called Dole Commission was never created, the Congressional controversy surrounding the ratification of the Uruguay Round Agreement has led to particular concern with USTR performance at the WTO. Curiously, enhanced Congressional concern has not gone hand in hand with more resources for USTR. Over the 1990s, USTR has rarely asked for, and, until 2000 has not received additional resources for its work.

The analysis here shows that if the USTR is concerned not only about the number of cases it wins but also about its rate of success, having more resources may have an ambiguous impact on the USTR's rate of success. Depending on how relatively promising are the additional cases that may yet be brought by USTR to the WTO, and how usefully additional resources may be applied to existing cases, it is possible that more resources can lower USTR's success rate. This is true, though for different reasons, when explicit allowance is made for the response by the other party to the dispute to a USTR commitment of additional resources.
More resources cannot explain the increased use that the USTR has made since the WTO was established, because until recently USTR has received no additional resources. Rather, a more predictable DSM may have encouraged more rather than fewer cases to be brought to the WTO in preference to further efforts at extra-WTO bilateral settlements.

471. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"Impacts on NAFTA Members of Multilateral and Regional Trading Arrangements and
Initiatives and Harmonization of NAFTA's External Tariffs" June 15, 2001; in Richard G. Harris, ed., North American Linkages: Opportunities and Challenges for Canada, Calgary: University of Calgary Press, 2003, pp. 359-390. ABSPDF

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the NAFTA member countries and other major trading countries/regions of a prospective new round of WTO multilateral trade negotiations, the variety of free trade agreements (FTAs) that the NAFTA members have negotiated or are considering, and the adoption of a system of common external tariffs by the NAFTA members. We estimate that an assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $13.5 billion for Canada, $6.5 billion for Mexico, and significant gains for all other industrialized and developing countries. If there were global free trade, world welfare would increase three-fold to $1.9 trillion and the country/region gains would be similarly larger.

Regional FTAs such as an expansion of NAFTA to include Chile and a Western Hemisphere FTA would increase global and member-country welfare but much less than a new WTO multilateral trade round would. Separate bilateral FTAs negotiated or being considered by Canada, Mexico, and the United States would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. If the NAFTA members were to adopt a system of common external tariffs to replace their existing differentiated external tariffs, a system based on trade weights would have less distortive effects on trade and welfare than a system based on simple averages or production-weighted tariffs.

470. Stern, Robert M., "Quantifying Barriers to Trade in Services" November 8, 2000; in Bernard Hoekman, Philip English, and Aaditya Mattoo (eds.), Development, Trade, and the WTO: A Handbook, The World Bank, 2002.
ABSPDF

Given the fact that international trade in services has been increasing significantly in recent decades and now is equal to about 20 percent of global merchandise trade, it is obviously important to consider the barriers that affect services trade and issues of measurement of these barriers. There has been similarly an increasing amount of foreign direct investment (FDI) in both goods and services sectors in and between advanced and developing countries. FDI is subject to a variety of barriers as well and thus merits attention in its own right. This paper reviews the literature on these barriers and presents data from several sources on what the sizes of the barriers to trade and investment in services may be.

469. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"Multilateral, Regional, and Bilateral Trade-Policy Options for the United States
and Japan" April 23, 2001. Revised as #490. ABSPDF

We have used the Michigan Model of World Production and Trade to simulate the economic effects on
the United States, Japan, and other major trading countries/regions of a prospective new round of WTO
multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving
the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs on
agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would
increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $123.7 billion
for Japan, and significant gains for all other industrialized and developing countries/regions. If there were
global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would
increase by $1.9 trillion, with gains of $537.2 billion (5.9 percent of GNP) for the United States and
$374.8 billion (5.8 percent of GNP) for Japan.

Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA
would increase global and member country welfare but much less so than a new WTO multilateral trade
round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile, and Korea and the
United States with Chile, Singapore, and Korea would have positive, though generally small, welfare
effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries.
There would be trade diversion and detrimental welfare effects on some nonmember countries for both
the regional and bilateral FTAs analyzed. The welfare gains from multilateral trade liberalization are
therefore considerably greater than the gains from preferential trading arrangements and more uniformly
positive for all countries.

We have used the Michigan Model of World Production and Trade to simulate the economic effects on
the United States, Japan, and other major trading countries/regions of: the Uruguay Round of multilateral
trade negotiations completed in 1993-94; a prospective new round of WTO multilateral trade
negotiations; and a variety of regional/bilateral free trade agreements (FTAs) involving the United States
and Japan. We estimate that the Uruguay Round negotiations increased global economic welfare by
$75.1 billion annually, with gains of $12.9 billion for the United States and $15.6 billion for Japan. An
assumed reduction of all post-Uruguay Round tariffs on agricultural and industrial products and of all
services barriers by 33 percent in a new WTO trade round is estimated to increase world welfare by
$613.0 billion, with gains of $177.3 billion for the United States and $123.7 billion for Japan. If there
were global free trade with all post-Uruguay Round trade barriers completely removed, then world
welfare would increase by $1.9 trillion, with gains of $537.2 billion (5.9 percent of GNP) for the United
States and $374.8 billion (5.8 percent of GNP) for Japan.

Elimination of APEC-member country bilateral post-Uruguay Round tariffs on agricultural and industrial
products and services barriers is estimated to increase world welfare by $764.4 billion, with gains of
$294.7 billion for the United States and $283.1 billion for Japan and losses of $7.0 billion for the
European Union/EFTA and $1.0 billion for South Asia. Separate bilateral FTAs involving Japan with
Singapore, Mexico, South Korea, and Chile and an ASEAN Plus-3 FTA involving Japan, China/Hong
Kong, and South Korea would have positive, though generally small, welfare effects, but potentially
disruptive sectoral employment shifts in some member countries. Depending on the agreement, there
may be detrimental welfare effects on some nonmembers. The welfare gains from multilateral trade
liberalization are therefore considerably greater than the gains from preferential trading arrangements and
more uniformly positive for all countries.

467. Deardorff, Alan V., Saul H. Hymans, Robert M. Stern, and
Chong Xiang, "Forecasting U.S. Trade in Services" March 30, 2000. In Robert M.
Stern, ed., Services in the International Economy: Measurement and Modeling, Sector
and Country Studies, and Issues in the WTO Services Negotiations, University of
Michigan Press, 2001, pp. 53-81. ABSPDF

This paper provides a set of forecasts of United States international trade in services, both at the
aggregate level and for four subcategories. These sectors are: travel, which is mostly tourist
expenditures; passenger fares, which is mostly passenger air transportation; transportation, other than
passenger transportation; and other private services, including education, financial services, insurance,
telecommunications, and business, professional and technical services. A forecasting model is
constructed and estimated, based on conventional economic forces of supply and demand, dependent
on cost variables and income variables as well as relative prices. For forecasting purposes, these
variables are taken from the Michigan Quarterly Econometric Model of the U.S. Economy, a
macroeconomic forecasting model with forecasts provided regularly by the University of Michigan
Research Seminar in Quantitative Economics.

The equations of the services trade model are reported and discussed, and the performance of
the estimated equations is evaluated. The quarterly forecast paths are provided for both aggregate and
sectoral services trade, including exports and imports, through the end of 2001. Results indicate that
imports will continue to rise over the forecast period, while exports, after remaining nearly stationary
for several quarters in some sectors in 1999, will resume their rise thereafter. This forecasting work is
to be continued, and it is suggested, in addition, that future research would be useful to explore the
determinants of the production and sales of foreign services affiliates of U.S. parent companies.

Are firms that engage in trade more vulnerable to exchange rate risk? In this paper we examine
the relationship between exchange rate movements, firm value and trade. Our empirical work
tests whether exchange rate exposure can be explained by variables that proxy for the level of
international activity, firm size, industry affiliation and country affiliation. The results suggest
that while a significant fraction of firms in these countries is exposed to exchange rate
movements, there is little evidence of a systematic link between exposure and trade. Indeed,
what little evidence there is of a link suggests that firms that engage in greater trade exhibit
lower degrees of exposure. This may reflect the fact that those firms most engaged in trade are
also the most aware of exchange rate risk, and therefore are the most likely to hedge their
exposure.

Finance theory suggests that changes in exchange rates should have little influence on asset
prices in a world with integrated capital markets. Indeed, the existing literature examining the
relationship between international stock prices and exchange rates finds little evidence of
systematic exchange rate exposure. We argue in this paper that the absence of evidence may be
due to restrictions imposed on the sample of data and the empirical specifications used in
previous studies. We study a broad sample of firms in eight countries over an eighteen-year
period. We find that firm-level and industry-level share values are significantly influenced by
exchange rates. Further, we do not find evidence that exchange rate exposure is falling (or
becoming less statistically significant) over time. Our results suggest that significant firm,
industry and country-specific differences remain even as financial markets become more and
more "integrated".

464. Kilian, Lutz and Mark P. Taylor, "Why Is It So Difficult
to Beat the Random Walk Forecast of Exchange Rates?" January 1, 2001; forthcoming
in the Journal of International Economics. ABSPDF

We propose a stylized exchange rate model based on diversity and weight of opinion.
Our model departs from standard assumptions in that we allow for heterogeneous agents. We
show that such a model can explain both the observed volatility and the persistence of real and
nominal exchange rate movements and thus in some measure resolves Rogoff√≠s (1996)
purchasing power parity puzzle. Our empirical analysis reconciles the well-known difficulties in
beating the random walk forecast model with the statistical evidence of nonlinear mean reversion
in deviations from fundamentals. We find strong evidence of long-horizon predictability both in
theory and in practice. We also explain why it is difficult to exploit this predictability in out-of-sample
forecasts. Our results not only lend support to economists√≠ beliefs that the exchange rate
is inherently predictable, but they also help us to understand the reluctance of applied forecasters
to abandon chartists methods in favor of models based on economic fundamentals.

This paper examines the special role that trade liberalization in service industries can play in stimulating not only trade in services itself, but also in stimulating trade in goods. International trade in goods requires inputs from several services industries - what I call trade services, such as transportation, insurance, and finance - in order to complete and facilitate international transactions. Restriction on the ability of national service providers to provide these services across borders and within foreign countries create additional costs and barriers to international trade above those that would arise in otherwise comparable intra-national exchange. As a result, trade liberalization in services can yield benefits, by facilitating trade in goods, that are larger than one might expect from analysis of the services trade alone. This paper explores this idea using simple theoretical models to specify the relationships between services trade and goods trade.

The paper also, to make the point more forcefully, notes the role of services trade in a model of international industrial fragmentation, where production processes can be separated across locations but at some cost in terms of additional service inputs. The incentives for such fragmentation can be larger across countries than within countries, due to the greater differences in factor prices and technologies that are available. However, the service costs of international fragmentation can also be larger, especially if regulations and restrictions impede the international provision of services. As a result, trade liberalization in services can also stimulate fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further.

462. Deardorff, Alan V., "Developing Country Growth and Developed
Country Response," August 14, 2000. Journal of International Trade and Economic
Development, 10, December 2001, pp. 373-392. ABSPDF

This paper makes a theoretical argument that growth in developing countries is likely to worsen the income distribution in developed countries and lead to a protectionist response that undermines the incentives for developing country growth. The model for this purpose is the two-cone version of the Heckscher-Ohlin (HO) trade model, in which countries have different factor prices even with free trade and in which they produce mostly different groups of goods. In that model, unlike the HO model with factor price equalization, growth by the poor country expands the output of its capital-intensive good, which is also the labor-intensive good of the other country. Regardless of whether factors are mobile or immobile across sectors, this reduces the real wages of factors that are either intensive or specific in the labor-intensive sector of the rich country. The paper argues that this will then lead to the rich country restricting trade. This in turn will lower the return to capital in the poor country and reduce the incentive for further growth.

This paper argues that successful development by developing countries causes adverse consequences for some factor owners in developed countries. These in turn seek protection from imports and that protection undermines the benefits to the developing countries of their own growth. Several of the main examples of protection in the world today can be interpreted as arising from this mechanism, including protection of textiles, apparel, and steel. More broadly, current resistance to globalization may be due in part to this phenomenon. The paper concludes with a brief discussion of how policies and institutions should respond to this, including increased use and improvement of programs of trade adjustment assistance.

460. Deardorff, Alan V. and Robert M. Stern, "What the Public
Should Know about Globalization and the World Trade Organization," July 20, 2000;
published as "What You Should Know about Globalization and the World Trade Organization,"
Review of International Economics 10 (August 2002), 404-423. ABSPDF

This paper reviews the essentials of economic globalization, as well as the major institution that has recently gotten much of the credit and blame for it, the World Trade Organization (WTO). It first defines globalization, which is just the increasing economic integration of the world economy. It then asks who gains and loses from globalization, drawing primarily upon economic theory to identify its benefits and costs, and who within and among the world's economies get them. That part of the discussion concludes by asking briefly what can and should be done about globalization.

The second half of the paper turns to the WTO, which was the focus of so much negative attention at its Seattle meeting in December 1999. For it too, we first ask what it is, trying to clarify several misperceptions about what it does and why. We then ask what groups gain and lose from the WTO, some simply as a byproduct of its role in facilitating globalization, but others from particular WTO rules and procedures. This takes us to the controversies that raged in Seattle, and we describe those events as they have been described to us by those who were there (we were not). We conclude with our suggestions as to what might be done to change both the WTO itself and the public's perceptions of it.

459. Chadha, Rajesh, Drusilla K. Brown, Alan V. Deardorff, and
Robert M. Stern, "Computational Analysis of the Impact on India of the Uruguay
Round and the Forthcoming WTO Trade Negotiations," March 28, 2000; in Aaditya Mattoo and Robert M. Stern (eds.), India and the WTO, The World Bank in collaboration with Oxford University Press, 2003.
ABSPDF

The Indian economy has experienced a major transformation during the decade of the 1990s.
Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also
had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO
framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign
investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral
aspect of India√≠s trade policy refers to India√≠s WTO commitments regarding trade in goods and services,
trade-related investment measures, and intellectual property rights. The present study analyzes the
economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade
liberalization and the liberalization that might be undertaken in a new WTO negotiating round. India√≠s
welfare gain is expected to be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully
implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future
WTO round of multilateral trade liberalization is achieved. Resources would be allocated in India to the
labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and
tobacco. These sectors would also experience growth in output and exports. Real returns to both labor
and capital would increase in the economy. The scale effect (percent change in output per firm) is
positive for all the ten sectors of manufacturing, indicating that Indian firms become more efficient than
before. Finally, even if India undertakes unilateral trade liberalization of the order indicated in the WTO
multilateral scenarios, it would still benefit, although less so than with multilateral liberalization.

Motivated by the Asian financial crises that began in 1997, this paper adds money to a
Ricardian model of international trade in order to explore the role of financing costs in general-equilibrium
trade. The purpose is to show not only that financing costs matter, but to argue a
potentially important effect of a financial crisis. If financial markets suddenly come to expect a
country√≠s currency to depreciate, as might happen if it has attempted an unsustainable peg, then
that expectation will itself force a depreciation. The depreciation will in turn make it impossible
for international traders to repay their financing, and their default will increase the costs of
financing trade in subsequent periods. Finally, this crisis-induced increase in costs of trade
financing then undermines both trade itself and the gains from trade. The paper also goes on to
argue that fragmentation √± the splitting of production processes across countries √± contributes to
both trade and the gains from trade, but in doing so it makes countries more vulnerable to these
effects of a financial crisis.

457. Stern, Robert M., "Labor Standards and Trade," February
17, 2000. In Marco Bronckers and Reinhard Quick (eds.), New Directions in International
Economic Law: Essays in Honor of John Jackson, Kluwer Law International, 2000,
pp. 425-438. ABSPDF

This paper explores the wide disparity of views on issues of international labor standards and the available options for addressing the issues involved. The discussion and analysis include: the definition and scope of labor standards; theoretical aspects of the economic effects of labor standards and the available empirical evidence; global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards; and implications for policy in dealing with labor standards. It is argued that, because of the diversity of labor standard in countries with differing national characteristics, policies, and institutions, the case for devising WTO rules and disciplines to improve core labor standards in low-income countries cannot be convincingly made. Further, there are no compelling theoretical and empirical grounds to support the international enforcement and harmonization of labor standards.

On a global level, the International Labor Organization (ILO) is best suited to provide a multilateral forum that would serve to strengthen its role and authority in pursuing improved labor standards internationally. The policies of the United States and other industrialized countries should be directed to maintaining open markets and encouraging the economic growth of their developing country trading partners. This is the surest way to achieve higher labor standards since there is pervasive historical evidence that standards are improved with higher levels of per capita incomes. National governments in developing countries should accordingly institute pro-active policies designed to improve working conditions and workers' rights as their economies expand and more resources can be channeled toward social betterment.

456. Stern, Robert M., "Developing Country Interests in
the Forthcoming WTO Negotiations," February 16, 2000; The
Journal of East Asian Affairs, Fall/Winter 1999.
ABSPDF

This paper reviews the main issues in the forthcoming WTO negotiations, including: a review of the accomplishments of the Uruguay Round and the multilateral negotiations that have since followed; identification and analysis of Uruguay Round built-in agenda issues and new issues that may possibly be considered in a new round; alternative negotiating modalities, including sectoral and broadly based negotiations and possible cross-issue linkages; dovetailing multilateral and regional negotiations; and interest-group alignments. In preparing for a new negotiating round, individual developing countries need to design with care their negotiating strategies and options. Countries have to decide what they want most to achieve from the negotiations and what they are willing to offer in return.

455. Deardorff, Alan V., "The Economics of Government Market
Intervention, and Its International Dimension," February 10, 2000. In Marco Bronckers
and Reinhard Quick (eds.), New Directions in International Economic Law: Essays
in Honor of John Jackson, Kluwer Law International, 2000, pp. 71-84. ABSPDF

This paper uses basic economic theory to examine the circumstances in which government intervention in markets is justified, and the conditions under which the independent domestic policy choices of national governments can potentially be unambiguously improved upon by international coordination and cooperation. In a closed economy, market intervention is justified when there are "distortions" from the perfectly competitive ideal in which all market participants fully internalize the costs and benefits of their choices and also are too small to affect the prices at which they transact. Similarly, when there are multiple countries, independent policy choices will be optimal only when the distortions being corrected are local and when the effects of the individual national policies on world prices are negligible. When both of these conditions hold, then governments should be left to their own devices in setting domestic policies, and this is true regardless of what domestic objectives these government legitimately pursue. However, when either the distortions themselves or the price effects of market intervention extend across borders, then independent policy choices will not be optimal. Whether it is possible to design a mechanism for international coordination that will improve matters, on the other hand, is open to question.

We investigate the significance of subcontracting arrangements as a source of knowledge transfer and increased efficiency for Czech firms during 1993 through 1996. We draw on detailed enterprise surveys and interviews with the managers of 373 manufacturing firms in the Prague region. The results suggest a positive correlation between employee training and subcontracting. Subcontracting is also associated with a reduction in variable costs and a price premium on the stock market. The effect of subcontracting on other firms in the same industry is weak. A high share of subcontracting activity in a particular industry is associated with increased valuation of firms without foreign partners as investors anticipate more subcontracting arrangements.

453. Brown, Drusilla K. and Robert M. Stern, "Measurement and
Modeling of the Economic Effects of Trade and Investment Barriers in Services,"
Revised, November 24, 2000; Review of International Economics, 2001.
ABSPDF

In this paper, we adapt the latest version of the Michigan Model of World Production and Trade to incorporate relationships and data for cross-border services trade and foreign direct investment (FDI) in the major developed and developing countries subsumed in the model's structure and database.

Firms are taken to be monopolistically competitive. Each firm produces a set of differentiated products. Products are differentiated both by the original R&D undertaken at headquarters that defines the basic product and by the final location of production. Each firm faces a fixed cost in the country where production occurs, and it then sets an optimal mark-up of price over marginal cost for sales from each location. Free entry guarantees that profits are zero.
Firms locate production for export or for local consumption depending on the type of barriers restraining the conduct of multinationals. In this version of the model, barriers to trade in services take two forms. First, firms may face an ad valorem tax on local capital installed. Second, foreign affiliate firms may face a policy-induced fixed cost of production for local operations..

We report the impact on welfare, trade, factor prices, sectoral output, economies of scale, and activities of multinationals that might occur following the introduction of national treatment of multinational firms in all countries of the model.

452. Barsky, Robert B. and Lutz Kilian, "A Monetary Explanation
of the Great Stagflation of the 1970s," January 27, 2000; forthcoming in the NBER
Macroeconomics Annual as "Do We Really Know that Oil Caused the Great Stagflation?
A Monetary Alternative". ABSPDF

The origins of stagflation and the possibility of its recurrence continue to be an important
concern among policymakers and in the popular press. It is common to associate the origins of the Great
Stagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This paper
argues that oil price increases were not nearly as essential a part of the causal mechanism generating
stagflation as is often thought. We provide a model that can explain the bulk of stagflation by monetary
expansions and contractions without reference to supply shocks. Monetary fluctuations also help to
explain variations in the price of oil (and other commodities) and help to account for the striking
coincidence of major oil price increases and worsening stagflation. In contrast, there is no theoretical
presumption that oil supply shocks are stagflationary. In particular, we show that oil supply shocks may
quite plausibly lower the GDP deflator and that there is little independent evidence that oil supply shocks
actually raised the deflator (as opposed to the CPI). The oil supply shock view also fails to explain the
dramatic surge in the price of other industrial commodities that preceded the 1973/74 oil price increase
and the fact that increases in industrial commodity prices lead oil price increases in the OPEC period.

451. Melitz, Marc, "When and How Should Infant Industries Be
Protected," October 11, 1999. ABSPDF

This paper develops and analyzes a welfare maximizing model of infant industry protection.
The domestic infant industry is competitive and experiences dynamic learning effects that are
external to firms. The competitive foreign industry is mature and produces a good that is an
imperfect substitute for the domestic good. A government planner can protect the infant industry
by using domestic production subsidies, tariffs, and quotas in order to maximize domestic
welfare over time. As protection is not always optimal even though the domestic industry
experiences a learning externality), the paper shows how the decision to protect the industry
should depend on the industry√≠s learning potential, the shape of the learning curve, and the
degree of substitutability between domestic and foreign goods.

Assuming some reasonable restrictions on the flexibility over time of the policy instruments,
the paper subsequently compares the effectiveness of the different instruments. The economics
literature has mainly explained the widespread use of quantity restrictions by appealing to
non-welfare-maximizing behavior of governments or strategic interactions between firms and/or
governments. In this work, quantity restrictions have been mostly interpreted as more distorting
than other trade instruments such as tariffs or domestic production subsidies. This paper
demonstrates that, under the model√≠s assumptions, the quota almost always yields higher welfare
than the tariff. In some cases, the dominance of the quota is so pronounced that it compensates
for any amount of government revenue loss caused by practical considerations involved in the
administration of the quota. (This is true even in the extreme case of a voluntary export
restraint, where no revenues would be collected.) It is further shown that the quota may even
be preferred to a domestic production subsidy. The paper thus introduces a new argument to
explain why quantity restrictions may create less distortions than tariffs or subsidies and can
potentially be welfare enhancing.

450. Kilian, Lutz and Tao Zha, "Quantifying the Half-Life of
Deviations from PPP: The Role of Economic Priors," October 5, 1999. Forthcoming
as "Quantifying the Uncertainty about the Half-Life of Deviations from PPP," Journal
of Applied Econometrics. ABSPDF

The half-life of deviations from purchasing power parity (PPP) plays a central role in the
ongoing debate about the ability of macroeconomic models to account for the time series behavior of the
real exchange rate. The main contribution of this paper is a general framework in which alternative priors
for the half-life of deviations from PPP can be examined. We show how to incorporate formally the prior
views of economists about the half-life. In our empirical analysis we provide two examples of such
priors. One example is a consensus prior consistent with widely held views among economists with a
professional interest in the PPP debate. The other example is a relatively diffuse prior designed to capture
a large degree of uncertainty about the half-life. Our methodology allows us to make explicit probability
statements about the half-life and to assess the likelihood that the half-life exceeds a given number of
years, without taking a stand on whether the data have a unit root or not. We find only very limited
support for the common view in the PPP literature that the half-life is between three and five years.

In this paper, we examine the correlation between sectoral shocks and border enforcement in
the United States. Enforcement of national borders is the main policy instrument the U.S. government
uses to combat illegal immigration. The motivation for the exercise is to see whether border
enforcement falls following positive shocks to sectors that are intensive in the use of undocumented
labor, as would be consistent with political economy models of how enforcement policy against illegal
immigration is determined. The main finding is that border enforcement is negatively correlated with
lagged relative price changes in the apparel, fruits and vegetables, and slaughtered livestock industries
and with housing starts in the western United States. This suggests that authorities relax border
enforcement when the demand for undocumented workers is high.

448. Hanson, Gordon H. and Matthew J. Slaughter, "The Rybczynski
Theorem, Factor-Price Equalization, and Immigration: Evidence from U.S. States,"
April, 1999. Forthcoming as "Labor Market Adjustment in Open Economies: Evidence
from U.S. States," Journal of International Economics. ABSPDF

Recent literature on the labor-market effects of U.S. immigration tends to find little
correlation between regional immigrant inflows and changes in relative regional wages. In this
paper we examine whether immigration, or endowment shocks more generally, altered U.S.
regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade
theory. This theorem describes how regions can absorb endowment shocks via changes in output
mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we
search for evidence of regional output-mix effects using a new data set that combines state
endowments, outputs, and employment in 1980 and 1990. We have two main findings. First,
state output-mix changes broadly match state endowment changes. Second, variation in state unit
factor requirements is consistent with relative factor-price equalization (FPE) across states, which
is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest
that states absorb regional endowment shocks through mechanisms other than changes in relative
regional factor prices.

In this paper, we examine the impact of government enforcement of the U.S.-Mexico
border on wages in the border regions of the United States and Mexico. The U.S. Border Patrol
polices U.S. boundaries, seeking to apprehend any individual attempting to enter the United
States illegally. These efforts are concentrated on the Mexican border, as most illegal immigrants
embark from a Mexican border city and choose a U.S. border state as their final destination. We
examine labor markets in southern California, southwestern Texas, and Mexican cities on the
U.S.-Mexico border. For each region, we have high-frequency time-series data on wages and on
the number of person hours that the U.S. Border Patrol spends policing border areas. For a range
of empirical specifications and definitions of regional labor markets, we find little impact of
border enforcement on wages in U.S. border cities and a moderate negative impact of border
enforcement on wages in Mexican border cities. These findings are consistent with two
hypothesis: (1) border enforcement has a minimal impact on illegal immigration, or (2) illegal
immigration from Mexico has a minimal impact on wages in U.S. border areas.

The recent financial crisis in Indonesia has resulted in dramatic price
increases. Using very recent data, we investigate whether these price
increases have impacted the cost-of-living of poor households in a
disproportionately harsh way. We find that the poor have indeed been hit
hardest. Just how hard the poor have been hit, though, depends crucially on
where the household lives, whether the household is in a rural or urban area,
and just how the cost-of-living index is computed. What is clear is that the
notion that the very poor are so poor as to be insulated from international
shocks is simply wrong. Rather, in the Indonesian case, the very poor appear
the most vulnerable.

445. Levinsohn, James and Amil Petrin, "When Industries Become
More Productive, Do Firms?: Investigating Productivity Dynamics," January 27,
1999. ABSPDF

This paper investigates two explanations for why industries might become
more productive over time. The first explanation, termed the real productivity
case,' is one in which firms become more productive and this leads to more
productive industries. The second explanation, termed the rationalization
case,' is one in which firm productivity is constant, but productive firms
expand while less productive firms either shrink or exit. Each case has very
different implications for factor markets, long term growth prospects, and
public policy regarding productivity. Further, one can only distinguish
between these two cases with plant- or firm-level data. We investigate the
empirical relevance of the two cases using the Chilean manufacturing census.
We find that the rationalization case explains much of the measured increase
in industry productivity. When industry productivity fails, the rationalization
case appears much less important. We also contribute to the applied
econometric literature on productivity estimation as we show that the
value-added production function is especially well-suited to a simple
extension of recent methods developed by Oiley and Pakes.

444. Caner, Mehmet and Lutz Kilian, "Size Distortions of Tests
of the Null Hypothesis of Stationarity: Evidence and Implications for the PPP
Debate," July 30, 1999; forthcoming in Journal of International Money and Finance.
ABSPDF

Tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance. We show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions, if the model under the null hypothesis is highly persistent. This fact calls into question the use of these tests in empirical work. We illustrate the practical importance of this point for tests of long-run purchasing power parity under the recent float. We show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long-run PPP. While the size distortions may be overcome by the use of finite-sample critical values, the resulting tests tend to have low power under economically plausible assumptions about the half-life of deviations from PPP. Thus, the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion. Only in the rare case that stationarity is rejected do size-corrected tests shed light on the question of long-run PPP.

This paper examines the implications of the Heckscher-Ohlin (HO) Model for the patterns
of production and trade that will emerge as a country grows. It focuses primarily on world
equilibria that include two or more cones of diversification. Starting with the textbook model of
two factors and two goods, growth paths for production and trade are derived in terms of a
country√≠s capital-labor ratio relative to that of the world. With additional goods and countries,
multiple cones create a ladder of comparative advantage that a country will climb as it
accumulates capital relative to the world. With additional factors as well, more complicated
patterns can emerge. In a three-factor model based on Krueger (1977), a country with fixed land,
growing labor, and faster growing capital can first work its way down the ladder of comparative
advantage before climbing back up. Using a graphical representation of a more general three-factor
model due to Leamer (1987), cones of diversification with large numbers of goods take the
form of polygons that a growing country may pass through, then cross between. In all cases, the
lesson of the HO Model is that growth causes repeated and extreme changes in patterns of
specialization and trade over time.

This paper reviews the various economic effects on Algeria of accepting the European Union's invitation to enter into an economic partnership, as has already been done by two other countries of the Maghreb, Morocco and Tunisia. These Euro-Mediterranean partnerships consist primarily of the formation of free trade areas, FTAs, including the EU and the country involved, so my analysis is devoted primarily to the economic effects of an FTA. However, the occasion of forming an FTA also provides an opportunity to undertake several additional steps toward integration, which I also examine. These are 1) deeper integration, 2) extension of the FTA to include other neighboring countries, and 3) reductions in tariffs on imports from the rest of the world. The paper concludes that an EU-Algeria FTA would probably be good for Algeria, but the benefits can be substantially enhanced and the costs reduced by pursuing also one or more of these additional steps.

441. Deardorff, Alan V. and Robert M. Stern, Table of Contents
and Chapter 1 of Social Dimensions of U.S. Trade Policy, June 7, 1999.
Volume published Ann Arbor, MI: The University of Michigan Press, 2000. ABSPDF

Proceedings of a Conference held in Washington, D.C., April 16-17, 1998. The contributors include members of the trade policy
community who analyze and discuss the salient social dimensions of U.S. trade
policies. These issues include the effects of trade on wage inequality; trade and
immigration policy; U.S. trade adjustment assistance policies; the effects of NAFTA
on environmental quality; the role of labor standards in U.S. trade policies; the
economics of labor standards and the GATT; issues of child labor; and the role of
interest groups in the design and implementation of U.S. trade policies.

This paper examines the choice of policies to redistribute income in response to an increase in inequality caused by a rise in the differential wage paid to skilled labor compared to unskilled labor. The main issue is whether the appropriate policy response depends on the cause of the increased differential. In particular, should policies respond any differently if the rising differential is due to "trade" √± shorthand for greater openness in global markets and/or greater participation in those markets by developing countries abundantly endowed with unskilled labor √± or due to technological changes that have favored skilled labor over unskilled labor. The analysis is conducted within the context of a two-sector Heckscher-Ohlin trade model augmented to allow endogenous determination of the level of skill. Utility possibility frontiers are constructed for various policies, then shifted as a result of changes in trade and technology. The conclusion is that the usual trade economists' argument against the use of trade policies applies in this context as well, regardless of the source of the worsening income distribution. If trade is the best available tool for dealing with a trade-induced increase in inequality, then trade policy will also be best for dealing with inequality induced by technology. But more likely, the preferred policy will be a tax/subsidy focused more directly on factors employed, and this preference too will hold regardless of the relative contributions of trade and technology to causing the problem being addressed.

In this paper, I examine the spatial correlation of wages, employment, and consumer
purchasing power across U.S. counties to see whether regional product-market linkages contribute
to spatial agglomeration. First, I estimate a simple market-potential function, which is a reduced
form for several economic geography models. This specification resembles a spatial labor
demand function, as it is proximity to consumer markets that determines nominal wages and
employment in a given location. The estimation results indicate how far demand linkages extend
across space and how income shocks in one location affect other locations. Second, I estimate
a more elaborate market-potential function derived from the Krugman model of economic
geography. The parameter estimates reflect the importance of scale economies and transport
costs, the stability of spatial agglomeration patterns, and how these features evolve over time.

In this paper, we examine the impact of government enforcement of the U.S.-Mexico
border on wages in the border regions of the United States and Mexico. The U.S. Border Patrol
polices U.S. boundaries, seeking to apprehend any individual attempting to enter the United
States illegally. These efforts are concentrated on the Mexican border, as most illegal immigrants
embark from a Mexican border city and choose a U.S. border state as their final destination. We
examine labor markets in southern California, southwestern Texas, and Mexican cities on the
U.S.-Mexico border. For each region, we have high-frequency time-series data on wages and on
the number of person hours that the U.S. Border Patrol spends policing border areas. For a range
of empirical specifications and definitions of regional labor markets, we find little impact of
border enforcement on wages in U.S. border cities and a moderate negative impact of border
enforcement on wages in Mexican border cities. These findings are consistent with two
hypothesis: (1) border enforcement has a minimal impact on illegal immigration, or (2) illegal
immigration from Mexico has a minimal impact on wages in U.S. border areas.

437. Stern, Robert M., "Dynamic Aspects of the Euro-Mediterranean
Agreements for the MENA Countries," April 14, 1999. In Sebastien Dessus, Raed
Safadi, and Julia Devlin (eds.), The Dynamics of New Regionalism in MENA: Integration,
Euro-Med Partnership Agreements and After, OECD, Paris, forthcoming. ABSPDF

This paper addresses the variety of static and dynamic impacts that the Euro-Med Agreements (EMA) may have on the MENA economies. It first considers options for trade and domestic policy reforms, including the context in which policies are designed and implemented and the range of policy options spanning unilateral measures, multilateral measures, and preferential arrangements such as the EMAs. It then sets out the comparative static and dynamic-growth frameworks for analyzing the effects of alternative policies. This is followed by a review of ex ante assessments of existing and proposed EMAs using CGE modeling and qualitative analysis and the potential dynamic effects that EMAs may bring about. Because EMAs are limited in scope, there is no guarantee that the MENA economies will realize significant dynamic benefits. Nonetheless, if EMAs result in enhancing policy credibility, the MENA economies might well improve their dynamic-growth prospects by instituting effective unilateral domestic-policy reforms and aligning their foreign trade and investment policies more closely on a multilateral basis with the global trading community.

Recent literature on the labor-market effects of U.S. immigration tends to find little
correlation between regional immigrant inflows and changes in relative regional wages. In this
paper we examine whether immigration, or endowment shocks more generally, altered U.S.
regional output mixes as predicted by the Rybczynski Theorem of Heckscher-Ohlin (HO) trade
theory. This theorem describes how regions can absorb endowment shocks via changes in output
mix without any changes in relative regional factor prices. Treating U.S. states as HO regions, we
search for evidence of regional output-mix effects using a new data set that combines state
endowments, outputs, and employment in 1980 and 1990. We have two main findings. First,
state output-mix changes broadly match state endowment changes. Second, variation in state unit
factor requirements is consistent with relative factor-price equalization (FPE) across states, which
is a sufficient condition for our output-mix hypothesis to hold. Overall, these findings suggest
that states absorb regional endowment shocks through mechanisms other than changes in relative
regional factor prices.

A half-century of empirical work on the factor proportions theory has identified
√¨paradoxes√Æ and √¨mysteries,√Æ but has failed to devise simple amendments that bring theory and data
into reasonable congruence. Our study considers standard and novel hypotheses regarding the failures
of the Heckscher-Ohlin-Vanek formulation and is the first to examine these directly on the technology
and absorption data of interest. We show how a few simple and plausible amendments, verified
directly by this data, suffice for a striking confirmation of the HOV theory. Countries export the
services of abundant factors and in approximately the right magnitude. HOV works.

434. Xiang, Chong., "The Sufficiency of the 'Lens Condition'
for Factor Price Equalization in the Case of Two Factors," January 11, 1999. Journal
of International Economics 53, 2001, pp. 463-474. ABSPDF

Factor price equalization (FPE) is a central theme in trade theory, for which Dixit and
Norman (1980) establish the necessary and sufficient condition (the FPE condition).
Deardorff (1994) provides a more intuitive condition (the lens condition) and establishes
its necessity in general, as well as its sufficiency for the case of 2 countries. In this paper,
I prove that the lens condition is sufficient for FPE in the case of 2 factors. This theorem
has implications for empirical work.

433. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"U.S. Trade and Other Policy Options and Programs to Deter Foreign Expoitation
of Child Labor," February 19, 1999. In Magnus Blomström and Linda S. Goldberg,
eds., Topics in Empirical International Economics: A Festschrift in Honor of
Robert E. Lipsey, University of Chicago Press, 2001. ABSPDF

The purpose of this paper is to explore issues of child labor exploitation in developing countries and the variety of trade and other policy options and programs that are available to the United States and other major industrialized countries to deter such exploitation. We begin with a discussion of the determinants of child labor and selected information on the global, national, and sectoral employment of children. We then discuss the range of policies and programs used in the United States to help effect a reduction in foreign child labor. With the foregoing as background, we turn to conceptual considerations, examining first the process of monitoring of child labor, and second the economic determinants of child labor and the expected consequences of alternative measures that are designed to reduce child labor. The paper concludes by drawing out the implications of the discussion for policy.

432. Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
"Computational Analysis of the Accession of Chile to the NAFTA and Western Hemisphere
Integration," October 16, 1998. The World Economy 23, (February 2000),
pp. 145-174. ABSPDFComplete Tables

We present the results based on the Michigan computational general equilibrium model of Western
Hemisphere economic integration. It is shown that tariff elimination will have beneficial effects for most
countries involved, although the benefits as well as the costs of liberalization are small. However, if a
hemispheric treaty were to stimulate an increase in the capital stocks of the major South American
economies, the welfare gains would be substantial. Sensitivity tests reveal that the model exaggerates the
likely gains from economies of scale due to liberalization. But the error is small in this context because
the impact of trade liberalization is small. When econometric estimates of scale economies are
incorporated into the model, the welfare gains due to capital flows nevertheless remain robust. A
comparison of results for Chile using different databases indicates that the impact of regional
liberalization using a 1980 database may overstate the impact on the nonferrous metals sector in particular
and manufacturing more generally. Nonetheless, when using a 1990 database, the change in output of the
nonferrous metals sector remain larger than for any other sectors in the Chilean economy.

This paper first notes the importance of √¨one-cone√Æ versus √¨multi-cone√Æ equilibria in the
Heckscher-Ohlin Model of international trade, then asks whether the process of economic growth
as modeled in neoclassical growth models tends to lead the world more toward one or the other.
The one-cone model has been the workhorse of international trade theory for many years. It is
characterized by a single set (cone) of relative factor endowment combinations within which
countries can diversify their production of all goods. If all countries√≠ factor endowments are
within that cone, then there is global factor price equalization (FPE) under free trade. The multi-cone
model has received attention more recently, and includes separate cones of diversification
within each of which there is FPE, but across which factor prices differ. There are several
important differences between these two models. The paper examines several neoclassical models
of trade and growth, distinguished by their assumptions about the determinants of saving, to see
what they imply about the convergence or non-convergence of country factor endowments into a
single cone. None of the models suggest convergence, while some of them strongly imply that
different countries will end up in different cones. This therefore suggests that the multi-cone
version of the Heckscher-Ohlin model should be preferred.

430. Stern, Robert M., "Labor Standards and International Trade,"
January 16, 1998. Published in Institute for the Integration of Latin America
and the Caribbean, Integration and Trade, May/June 1999, in English and
Spanish. ABSPDF

There is a wide disparity of views on issues of international labor standards. Labor and social activists are concerned about the increased imports from countries in which labor standards are ostensibly not enforced at a sufficiently high level. They fear that these imports will be detrimental to wages and working conditions in the industrialized importing countries. The purpose of this paper is to explore these different views and the available options for addressing the issues involved. The paper begins with the definition and scope of labor standards, then turns to theoretical aspects of the economic effects of labor standards. These are followed by a summary of the available empirical evidence. Global, regional, national/unilateral, and other arrangements for the monitoring and enforcement of labor standards are then discussed.

A test of the Heckscher-Ohlin-Vanek [HOV] hypothesis for the cases when factor price equalization does not hold is developed. For all the possible country pairs of the BLS (1987) and Trefler (1995) data set, I test whether trade reveals the relative factor abundance of one country compared to another. For the factor pairs capital-labor, labor-land and land-capital, I investigate whether the higher endowment ratio of one country compared to another is reflected in their multilateral trade. A strength of the method is that technology differences, measurement error or home bias are allowed for, but do not have to be estimated. For the hundreds of country pairs, the relative abundance of two countries is revealed in trade in about 75 percent of the cases. In other words, endowments do matter. The more different are country endowments, the stronger are the results. I explicitly study North-South trade and find that it reflects the North's relative capital abundance in over 90 percent of the cases. The obtained sign test results are also analyzed with a probit model. A probit analysis helps to detect empirically other factors than endowment differences that affect the performance of the HOV prediction.

428. Deardorff, Alan V., "Technology, Trade, and Increasing
Inequality: Does the Cause Matter for the Cure?" June 17, 1998. Journal of
International Economic Law, September 1998, pp. 353-376. ABSPDF

This paper addresses an issue that has received a great deal of attention in recent years, both from international trade economists and from labor economists: What has caused the relative wage of skilled labor compared to unskilled labor in the United States to increase through the 1980s and 1990s? Prime candidates for causing this change have been "trade" √± the increased competition of U.S. workers with unskilled workers abroad √± and "technology" √± new products and processes that may have increased the productivity of skilled workers or skill-intensive industries relative to their unskilled counterparts. The paper reviews what has happened to relative wages and the explanations that have been suggested. A brief look at the empirical evidence from this literature is suggestive, but hardly conclusive. But the paper then asks whether the answer to this question really matters. It turns out that the appropriate policies for dealing with this change in relative wages do not depend on whether the cause of the change has been trade or technology. The paper concludes with an argument about the first-best policy for dealing with the increased wage differential, but also with some skepticism that any policy at all is needed.

427. Deardorff, Alan V., "Fragmentation across Cones," August
7, 1998. In Sven W. Arndt and Henryk Kierzkowski, eds., Fragmentation: New
Production Patterns in the World Economy, Oxford, 2001. ABSPDF

This paper examines the effects of fragmentation across cones of diversification in the Heckscher-Ohlin model of international trade. Fragmentation is defined as the splitting of production processes into parts that can be done in different countries. Such fragmentation may occur in a world of factor price equalization (FPE) only if it is costless, and even then it is uninteresting. It becomes more important in a world without FPE, where countries operate in different diversification cones. In that case even costly fragmentation (which uses more resources than the original) may be able to produce a good at a lower cost than the original unfragmented technology, if it can take advantage of different factor prices in different countries. The paper shows when this will be the case, then goes on to examine the effects of fragmentation on factor prices. It is already known that introduction of fragmentation can lead to FPE when FPE did not obtain initially. But it need not do so, and the paper explores the directions of the effects on relative factor prices when they do not become equalized. It turns out that factor prices may actually be driven further apart by fragmentation. This is suggested diagrammatically, and also shown more formally for the case of Cobb-Douglas preferences and technologies.

426. McAusland, Carol, "Learning by Doing in the Presence of
an Open Access Renewable Resource: Is Growth Sustainable?" February 13, 1998.
ABSPDF

This paper focuses on the impact of technological progress (modeled as
learning by doing) on economic growth when one of the inputs in production
is an open access renewable resource. Technological progress is found to indi-
rectly induce resource depletion, such that sustainable growth will not occur in
autarky under certain preferences, and is possible in trade only if the resource
sector contracts over time or shuts down completely. Comparisons of steady
state welfare in autarky and free trade reveal that for very high or low world
prices of the resource-based good, it is possible for the economy to gain from
trade. However if the price is intermediate, it will instead lose.

425. Rowland, Patrick F. and Linda Tesar, "Multinationals and
the Gains from International Diversification" August 24, 1998. ABSPDF

One possible explanation for home bias is that investors may obtain indirect international diversification
benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper
employs mean-variance spanning tests to examine the diversification potential of multinational firms and
foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United
Kingdom and the United States. We find that in most countries and most time periods, the portfolio of
domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and
multinational stocks. However, there is weak evidence that U.S. multinationals provided global
diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the
addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides
diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the
utility gain from diversification - varies considerably from market to market and often reflects the benefits
of large short positions in certain markets.

424. Stern, Robert M., "The WTO Trade Policy Review of the United
States, 1996" February 3, 1998. The World Economy, August 1998. ABSPDF

This paper assesses the major developments in U.S. trade policies since the creation of the WTO in 1995. It is based in large measure on the fourth biannual (1996) WTO Trade Policy Review of the United States and updated through 1997. The discussion and assessments include in particular: the major U.S. multilateral trade-policy issues and activities centered in the WTO: issues and activities relating to NAFTA; U.S. bilateral trade relations with its major trading partners; administration of U.S. trade laws and regulations; and U.S. agricultural trade policies.

This paper is the text of a lecture given on November 20, 1997 to inaugurate the John W. Sweetland Chair in International Economics, in the Department of Economics of the University of Michigan. Its message is that international trade theory, and in particular the theory of comparative advantage, is really just an application of benefit-cost analysis. This is true both of many of the tools of trade theory, which are familiar as the same tools by which benefit-cost examines all sorts of public projects and policies, and of the implications of the theory. Trade theory does not say, as sometimes claimed, that international trade is necessarily and always good for everyone. On the contrary, the theory of comparative advantage identifies both winners and losers from international trade, and the subtlety of the argument, much like many applications of benefit-cost analysis, consists of quantifying and comparing the gains and losses. The paper works through both the partial and the general equilibrium analyses of trade under a range of assumptions from implausibly perfect to realistically messy. It discusses who gains and who loses from trade in each case, as well as the strength of the argument that the gains outweigh the losses.

This paper examines the effects of "fragmentation," defined as the splitting of a production process into two or more steps that can be undertaken in different locations but that lead to the same final product. Introducing the possibility of fragmentation into simple theoretical models of international trade, the paper finds the effects of fragmentation on national welfare, on patterns of specialization and trade, and on factor prices. Models examined include the Ricardian Model and the Heckscher-Ohlin Model, both for small open economies and for a two-country world. Results are as follows: 1. If fragmentation does not change the prices of goods, then it must increase the value of output of any country where it occurs and that of the world. 2. If fragmentation does change prices, then fragmentation can lower the welfare of a country by turning its terms of trade against it. 3. Even in a country that gains from fragmentation, it is possible (but not necessary) that some factor owners within that country will lose. 4. To the extent that factor prices are not equalized internationally in the absence of fragmentation, fragmentation may be a force toward factor price equalization.

The endogenous growth literature raises the possibility that countries may grow without bound in terms of per capita income, and that they may do so at different rates. This possibility also exists in neoclassical growth models with diverging populations √± populations that grow at different rates. In both cases, however, this means that international inequality of per capita incomes will not only exist but also get worse over time. This paper examines that possibility within a very simple one-sector model that allows for both diverging populations and endogenous growth. The model also allows for "meaningless" trade and international direct investment, in the sense that these occur at random across countries when traders and investors are indifferent among locations. The model suggests that if people behave as needed to generate endogenous growth, then international per capita income inequality is likely to increase without bound over time, along with increases in apparent importance of international trade and investment in the world economy, a result that may suggest increasing resentment and friction across countries. The simple model, including its odd approach to trade and investment, is argued to be robust to several more conventional and complex specifications. However, the results, including endogenous growth itself, depend on behavioral parameters that may not be empirically relevant or therefore a serious cause for concern.

This paper is about the interactions between what is traditionally considered trade policy and a narrow but important aspect of competition policy, namely merger policy. We focus on links between merger policies and trade liberalization. Interpreting merger policy as a choice of degree of industrial concentration, we investigate how the merger policy that is optimal from the point of view of an individual country is affected by restrictions on the use of tariffs and export subsidies. Two general points emerge. First, merger policies are indeed associated with international externalities in open economies. And second, we argue that one should not expect to find any particular relationship between trade policy and merger policy. In particular, there seems to be no presumption that international trade liberalization induces countries to pursue merger policies that have more of a beggar-thy-neighbor flavor.

This paper explores the rule system of the World Trade Organization (WTO) as reflected mainly in the new and innovative WTO dispute settlement procedures. It begins with a retrospective look at the history of GATT on this subject. The goal of the rest of the paper is then not just to describe the procedures and the practice under them, but also to probe a number of fairly fundamental jurisprudential questions about these procedures, some of which have been apparent for some time, while others have only begun to emerge during the early years of actual application of the WTO Agreement.

Economic sanctions are not only a foreign policy tool but a form of trade policy. Like other kinds of trade policy, sanctions attract domestic political support from both protectionists and the human rights lobby. Sometimes the human rights lobby can piggyback on protectionists to encourage policy-makers to demand sanctions, while protectionists can also hijack the human rights issue for their own ends. Two variables, WTO membership and an independent legislature, affect both the likelihood and the form of sanctions in this domestic political environment. WTO membership, like MFN treatment in general, mobilizes export interests against a trade sanctions policy. Congress's more hawkish preferences on both trade policy and human rights mean that when the United States imposes sanctions against a WTO member, it is likely to do so under congressional leadership and perhaps against the will of the president. These variables color Sino-American trade relations today.

To date, virtually all the equity market literature analyzing the consequences of trade policy changes has assessed only the impact on the home country. Almost no attempt has been made to use equity-market data to assess simultaneously the impact of policy changes on the welfare of trading partners. Nor has this equity market literature attempted to evaluate the impact of trade negotiations. This paper attempts to work in both these neglected areas by assessing the impact on the value of selected equities in the United States and Japan of: (1) the enactment of the so-called "Super 301" legislation; (2) the inclusion of a significantly strengthened Dispute Settlement Mechanism in the final Uruguay Round Agreement; and (3) the Japan-U.S. Automobile Agreement of June 1995. In addition, the domestic political impact of operating in the post-Uruguay Round international economic environment is examined by evaluating the results of the Japan-U.S. Automobile Agreement using evidence from the Iowa Presidential Stock Market.

416. Stern, Robert M., "Constituent Interest Group Influences
on U.S. Trade Policies Since the Advent of the WTO" December 4, 1997. ABSPDF

This paper assesses the major developments in U.S. trade policies since the creation of the WTO in 1995.
It is based in large measure on the fourth biannual (1996) WTO Trade Policy Review of the United States
and updated through 1997. The discussion and assessments include in particular: the major U.S. multilat-eral
trade-policy issues and activities centered in the WTO: issues and activities relating to NAFTA; U.S.
bilateral trade relations with its major trading partners; administration of U.S. trade laws and regulations;
and U.S. agricultural trade policies.

415. Deardorff, Alan V. and Richard Hall, "Explaining the Role
of Interest Groups in United States Trade Policy" November 11, 1997. ABSPDF

This paper provides an alternative analytical view of the mechanism by which interest groups influence trade policy. In contrast to other economic models in which trade policy is essentially "bought" by industrial interests, this model views interest groups and legislators as possibly sharing the same objectives, which they then work together to pursue. The legislators have a limited budget of their own and their staff members' time to work on many issues, and the interest groups influence the process by helping with the work. By selecting legislators who are in closest agreement with their own objectives and then by assisting them in a way that, in effect, subsidizes their efforts, interest groups achieve a role in policy making that is potentially more important than if they merely used financial transfers. In the context of international trade policy, we view this model as applying not only to industries seeking protection, but also to many other interest groups who view restrictions of imports or other trade intervention as useful for their purposes. The latter need not have abundant financial resources in order to be effective, since their assistance can consist primarily of their members and volunteers' time, as well as the expertise that they have accumulated from experience in dealing with an issue.

414. Dominguez, Kathryn, "The Dollar Exposure of Japanese Companies"
Revised October, 1998. Journal of the Japanese and International Economies
12, 1998, pp. 388-405. ABSPDF

The bulk of Japanese exports and imports are denominated in dollars rather than
Japan's local currency, the yen.The consequences of dollar invoicing depend
importantly on whether Japanese companies hedge their dollar exposures. If
Japanese companies are able fully to hedge their dollar exposures either by
using derivative products, locating production in the United States or matching
dollar revenues with dollar costs then the choice of invoicing currency will
not influence the yen profits of Japanese companies. This paper estimates the
degree to which Japanese companies are exposed to movements in the dollar using
Japanese stock market data and an international version of the CAPM model to
estimate the extent to which Japanese company returns are correlated with
changes in the yen-dollar exchange rate. Presumably, if Japanese companies
fully hedge their dollar exposures, then their stock price changes should not
be correlated with movements in the dollar. Alternatively, if Japanese
companies cannot or choose not to hedge fully their dollar exposures, then
yen-dollar exchange rates will be correlated with stock prices.

The process of major economic reforms undertaken in the Indian economy has now completed six years
of implementation. The unilateral reform measures in the industrial and trade policies of India along with reforms
in the tax regime represent a significant departure from the policy framework of the preceding decades. Our paper
evaluates the comparative static effects of selected trade and domestic policy reforms on trade, output, domestic
prices, economic welfare, and the intersectoral allocation of resources using a computable general equilibrium
(CGE) model of the Indian economy.

The results indicate that the import liberalization enhances the welfare of the economy, and that the effect
gets further enlarged if exports are also liberalized simultaneously. This is particularly true of the agricultural
sectors. The freeing of prices in the sectors which were under some form of administered price controls in the
base year (1989-90) adds noticeably to the welfare effect. The economy becomes more efficient through
reallocation of land, labor and capital across different producing sectors with increases in the returns to each of
the factors of production. The rationalization of the existing structure of indirect taxes (mainly excise) and
subsidies is expected to further benefit the factors of production and enhance overall welfare. Though such ex-ante
analysis may not be replicated ex-post due to various macroeconomic and other factors that our model does
not capture, the positive results nevertheless go a long way in establishing the credibility of the reforms process.

One of the great unknowns in international finance is the process by which new
information influences exchange rate behavior. Until recently, data constraints
have limited our ability to examine this issue. The Olsen and Associates
high-frequency spot market data greatly expand the range of testable hypotheses
regarding the influence of information. This paper focuses on one important
source of information to the foreign exchange markets, the intervention
operations of the G-3 central banks. Previous studies using daily and weekly
foreign exchange rate data suggest that central bank intervention operations
can influence both the level and variance of exchange rates, but little is
known about how exactly traders learn about these operations and whether
intra-daily market conditions influence their effectiveness. Using
high-frequency data, this paper will examine the relationship between the
efficacy of intervention operations and the "state of the market" at the moment
that the operation is made public to traders.

For most firms, size and diversification are correlated with lower value. However, for firms
possessing substantial information-based asset, geographical diversification, line of business
diversification, and growth in general, add value. This is consistent with information-based
assets being a critical prerequisite for synergy, as postulated in internalization theories of
synergy.

Stock prices in emerging economies move in step much more than in advanced economies.
Emerging markets√≠ prices capitalize less firm specific information, and appear subject to more
economy-wide fluctuations. Measures of this consonance of stock returns are positively correlated
with indicators of poor property rights protection, inefficient legal systems and corrupt government.
Lax accounting standards strengthen these correlations, but do not have an independent effect. We
argue that property rights, judicial efficiency, clean government and meaningful accounting
information let stock markets process information and allocate capital better, and thus contribute
to economic growth. The absence of these factors may discourage informed trading and foster noise
trading.

This paper examines the usefulness of a result of Deardorff and Staiger (1988), who showed that the factor content of trade can be interpreted under certain assumptions as indicating the nature of the factor price adjustments that can, in a specified sense, be attributed to that trade. This paper elaborates on the sense in which this result says anything about the factor market effects of trade. It also examines several of the assumptions that were used by Deardorff and Staiger to determine whether they can be relaxed. These include the assumption, used for only one of Deardorff and Staiger's several results, of Cobb-Douglas technology, which is shown to be easily extended to Constant Elasticity of Substitution. Also examined is the assumption of nonspecialization, or that all imported goods are produced or producable in the domestic economy. With Cobb-Douglas technology that assumption is shown not to be needed. With more general technology, however, the presence of non-competing imports requires a reinterpretation of the factor content of trade. Whereas without noncompeting imports, trade itself is analogous, in terms of its effects on factor markets, to a change in factor endowments equal to the factor content of trade, with noncompeting imports trade has an additional effect analogous to a Hicks-neutral technological improvement enabling those noncompeting imports to be produced competitively.

This paper examines the interdependence and coordination of monetary and
exchange rate policies among the G-3 countries over the period 1977 through
1993. The results in the paper suggest that the international monetary
transmission mechanism is important, and that, among the G-3, US policies are
the most influential. Further, it suggests that the G-3 generally honor
international monetary policy commitments, although in the case of Germany the
commitments seem to have coincided with domestic policy objectives.

407. Morck, Randall and Jungsywan Sepanski and Bernard Yeung,
"Habitual and Occasional Lobbyers in the US Steel Industry" February 21, 1997.
Published as "Habitual and Non-Habitual Lobbyists in the US Steel Industry: An
EM Algorithm Approach," Economic Inquiry, 1999. ABSPDF

Using firm level data from the U.S. steel industry, we find that lobbying for import protection is habit forming, as suggested in
the rent-seeking literature. Controlling for firm performance and other factors, past lobbying increases the likelihood of
current lobbying in our full sample. Because addicted firms should behave differently from other firms, we let an EM
algorithm to sort our firms into groups with differing propensity to lobby. A two pools model consisting of occasional and
habitual rent-seekers emerges. Occasional rent-seekers' lobbying depends on their market performance.
Habitual rent-seekers' lobbying is unrelated to the market performance of the firm, and only depends on previous lobbying.
The evidence is consistent with political rent seeking having dynamic economies of scale: rent-seeking makes further
rent-seeking easier and more lucrative.

Feldstein and Horioka (1980) observed that saving and investment move
closely together in the major
OECD countries. This finding is a puzzle if national economies are
characterized by one sector production
functions of the form F(K,L). In that case, in a high saving country,
the high rate of investment and
capital accumulation would result in a decline of the marginal product
of capital, leading to an incentive for
exporting capital. In this paper, we show that this incentive disappears
in a multi-sector world. National
capital can be absorbed domestically without a decline in its marginal
product through a shift in the sectoral
composition of national production towards capital intensive sectors.
This is nothing but the well-known
Rybczynski effect. We present a modified version of the standard
Heckscher-Ohlin (HO) Model to show
that very small barriers to capital mobility are enough to force
national savings to stay within the country of
origin. We also argue that, while the assumptions of this model may
appear special, they are not
unrealistic for the developed countries in the Feldstein Horioka study.

Policies to redistribute income between high- and low-income groups are
well known to distort factor supply decisions and thereby to generate
deadweight losses incidental to income redistribution. This paper
examines the effects that these same distortions may also have on factor
supplies themselves, and thus on the implied patterns of production and
international trade. The point is not just that redistribution policies
may matter for trade, however, but that, through their effects on world
market prices and associated factor prices, the distributional effects
of redistribution policies spill over into the markets of a country's
trading partners. Using a standard two-factor, two-good Heckscher-Ohlin
Model with endogenous factor supplies of skilled and unskilled labor,
the paper derives the effects of a redistributive tax on factor
supplies, production, trade, world goods markets, factor markets, and
income distributions at home and abroad. One result is that a
redistributive tax by a large country is to some extent undermined in
its effects on its own income distribution by changes in world prices,
and also that such a policy tends to worsen the income distribution
abroad at the same time that it improves it at home. Another result is
that a redistributive tax will affect a country's terms of trade in ways
that will sometimes reinforce, other times offset, the incentive to
redistribute income. Both results have implications for the need for,
and desirability of, international coordination of policies for domestic
income redistribution. In particular, it is argued that high income
countries will tend to go too far in redistributing income, while low
income countries will not go far enough. Both could be better off if
they coordinated on changes in their distribution policies.

Deardorff (1994) provides a condition that is necessary for factor price
equalization across countries. That condition is a generalization of
"country endowments contained in the diversification cone" from the
standard 2x2x2 Hecksher-Ohlin model to the case of many goods, countries and
factors. He also shows that this condition is sufficient in the case of two
countries, and conjectures that sufficiency might hold in general. In this
paper we establish sufficiency in some further cases. However, we show by a
counterexample that the sufficiency does not hold in general.

There are two principal theories of why countries trade: comparative
advantage and increasing returns to scale. Yet there is no empirical work
that assesses the relative importance of these two theories in accounting
for production structure and trade. We use a framework that nests an
increasing returns model of economic geography featuring "home market"
effects with that of Heckscher-Ohlin. We employ these trade models to
account for the structure of OECD manufacturing production. The data
militate against the economic geography framework. Relatively few sectors
match its theoretical predictions. Moreover, of the explainable variation
in production patterns, endowments account for 90 per cent, economic
geography but 5 per cent.

A neoclassical growth model is used to provide an explanation for a
"poverty trap," or "club convergence," in terms of specialization and
international trade. The model has a large number of countries with
access to identical constant-returns-to-scale technologies for producing
and trading three goods using capital and labor. If initial factor
endowments of these countries are sufficiently diverse, then initial
equilibrium will not involve worldwide factor price equalization.
Instead, there will be two cones of diversification, and countries within
the lower of these cones will share identical factor prices and produce
relatively labor-intensive goods, while countries in the upper cone will
produce capital-intensive goods. If savings is determined only by wages,
then it is quite possible, perhaps even likely, that there will be
multiple steady states. Therefore over time, the poorer group of
countries will converge to a low steady-state capital-labor ratio and
hence remain poor, while the initially rich countries will converge to a
high steady-state and remain rich. This occurs even though all countries
share identical technological and behavioral parameters, and it is
therefore an example of club convergence. The model is also suggestive
of how patterns of growth may respond to changes in these parameters for
particular countries, including an increase in the savings rate and the
use of tariffs.

Long-horizon regression tests are widely used in empirical finance,
despite evidence of severe size distortions. I propose a new bootstrap
method for small-sample inference in long-horizon regressions. A Monte
Carlo study shows that this bootstrap test greatly reduces the size
distortions of conventional long-horizon regression tests. I also find
that long-horizon regression tests do not have power advantages against
economically plausible alternatives. The apparent lack of higher power
at long horizons suggests that previous findings of increasing
long-horizon predictability are more likely due to size distortions than
to power gains. I illustrate the use of the bootstrap method by
analyzing whether monetary fundamentals help predict changes in four
major exchange rates. In contrast to earlier studies, I find only weak
evidence of exchange rate predictability and no evidence of increasing
long-horizon predictability. Many of the differences in results can be
traced to the implementation of the test.

400. Deardorff, Alan V. and Robert M. Stern, "An Overview of
the Modeling of the Choices and Consequences of U.S. Trade Policy," May 28, 1997.
In Deardorff and Stern, eds., Constituent Interests and U.S. Trade Policies,
Ann Arbor, MI: University of Michigan Press, 1998, pp. 29-55. ABSPDF

Our paper is designed to provide the context for the theme of the
conference, "The Representation of Constituent Interests in the Design
and Implementation of U.S. Trade Policies." We begin by reviewing the
normative and political economy approaches to the modeling of trade
policies. We identify the major limitations of these approaches and then
discuss what Dixit (1996) has referred to as the "transaction-cost
approach," which may provide a middle ground between the other
approaches and enable us to address some hitherto imperfectly understood
issues of trade policy. We also include a brief discussion of the
empirical literature pertinent to the normative and political economy
approaches. We then turn to a sketch of the main features of the U.S.
trade-policy process, focusing in particular on the roles played by the
agencies of government together with the important constituent interest
groups in the U.S. economy. We consider how these can be interpreted in
the light of the modeling approaches, and we also ask what can be
learned from the past half-century of U.S. trade policy experiences.

399. Deardorff, Alan V. and Robert M. Stern, "Table of Contents"
and "Introduction" to Representation of Constituent Interests in the Design
and Implementation of U.S. Trade Policies: The Sweetland Conference, May 28,
1997. In Deardorff and Stern, eds., Constituent Interests and U.S. Trade Policies,
Ann Arbor, MI: University of Michigan Press, 1998, pp. 9-27. ABSPDF

This chapter introduces the proceedings of a conferences held on
November 8-9, 1996, in Ann Arbor, MI, honoring John Sweetland and his
late wife, Gayle, for the generous gift commitments that they have made
to the Michigan Department of Economics. The academic purpose of the
conference was to examine how constituent interests in the private
sector, non-profit sector, and government interact to determine United
States international trade policy. The conference brought together
authors and discussants from academic institutions, the private sector,
and the Ways and Means Committee of the U.S. House of Representatives.
In setting forth the aims of the conference, those involved were asked
in particular to address: (1) the objectives of trade policy sought by
the various interest groups who were the subject of their paper or
comments; (2) how each group1s interests are identified and promoted and
what means are used for these purposes; (3) the extent to which the
objectives and behavior of each group conform to how the political
economy of trade policy is treated in the economics and political
science literatures; and (4) how effective each group has been in
achieving its objectives.

There have been increasing calls in recent years in the United States
and other major industrialized countries for actions designed to
harmonize domestic policies, institutions, and practices especially with
regard to trade-related environmental and labor standards. As pointed
out by Anderson (1996) and Bhagwativx!flhqf| lq ixuwkhu fdvhv1 Krzhyhu/ zh vkrz e| d f (1996), these calls for action have
been motivated by a host of moral, economic, structural, and political
factors. The purpose of our paper is to investigate the analytics,
empirical evidence, institutional arrangements, and available policy
options for address-ing the issues involved. The paper deals first with
the definition and scope of environmental and labor standards and then
with the rationales that have been put forward calling for their.
Theo-retical aspects of the economic effects of environmental and labor
standards are considered, and a summary of the available empirical
evidence is provided Finally, the monitoring and enforcement of
environmental and labor standards are discussed, followed by conclusions
and implications for policy.

The paper takes as its objective context the growing disparity in the
distribution of Foreign Direct Investment (FDI) among the developing
nations. While FDI in the developing world has grown fairly rapidly
since the late 1980s, a disaggregated analysis demonstrates a
considerable imbalance at the macro level. While China stands out as the
largest recipient, the Sub-Saharan African (SSA) countries and the
countries of Middle East and North Africa (MNA) are experiencing a
continuous drying up of inbound FDI. The goal of this paper is to first
develop a theoretical model of the economic determinants of FDI and
then use the structutral model to identify empirically the causes of and
suggest potential remedies for, the disparity in the distribution of
inward FDI among the developing economies.

396. Stern, Robert M., "Conflict and Cooperation in International
Economic Policy and Law," April 17, 1996. Journal of International Economic
Law 17, 1996. ABSPDF

This paper explores a number of conceptual issues that are germane to
the analysis of conflict and cooperation in international economic
policy and law. The focus is on issues involving conflict and
cooperation that have been treated in the theory of international trade,
in particular departures from the free trade optimum that is the centerpiece
of the theory of comparative advantage and the gains from trade.
Also considered are situations stemming from departures from full
employment and external balance that figure importantly in international
macroeconomic theory. Some concluding remarks are also made
with regard to the use of the Michigan Model of World Production and
Trade in providing quantitative analysis of potentially conflictual and
cooperative international economic actions and policies. While the
paper is written from an international economic perspective, it
hopefully will be informative to international legal analysts and policy
makers as well.

In this study, done for the OECD, we assess currently available
methods for
quantifying nontariff barriers (NTBs) and make recommendations as to those
methods that
can be most effectively employed. We focus both on the conceptual
issues arising in the measurement of the different types of NTBs and on
the applied research that has been carried out in studies prepared by
country members of the OECD Pilot Group and others seeking to quantify
NTBs.

The paper begins with a a typology of NTBs and their
salient economic characteristics, then considers conceptual aspects
and selected applications of both general and specific purpose methods for
measuring the presence and size of NTBs. We provide an overview and
assessment of the methods and numerical results of the measurement of
NTBs drawn mainly from the OECD Pilot Group studies, and we highlight the
major lessons to be drawn from these studies. Finally, we conclude by
presenting our own guidelines for measuring NTBs, followed by detailed
recommendations of procedures to be used in individual cases and under
specific assumptions. Algebraic formulas pertinent to the recommended
procedures for measuring particular NTBs under varying assumptions are
presented and motivated in an appendix.

There is a wide disparity of views on issues of international labor
standards. The purpose of this paper is to explore these different
views and the available options for addressing the issues involved. We
conclude that there is no convincing case for incorporating labor
standards into the WTO and into U.S. trade agreements. The surest way
to improve labor standards is instead for the United States and other
industrialized countries to maintain open markets and to encourage the
growth of their developing country trading partners. Steps should also
be taken to support the activities of the International Labour
Organization to provide inducements and technical assistance to
help developing countries raise their labor standards.

In May, 1981, a voluntary export restraint (VER) was placed on exports
of automobiles from Japan
to the United States. As trade policies go, this one was important. The
automobile industry is the
largest manufacturing industry in the United States and the initiation
of the VER captured head-
lines in the popular press. At about the same time, though to much less
fanfare, international trade
theorists were obtaining (then) startling results from models of
international trade in imperfectly
competitive markets. These models suggested that in imperfectly
competitive markets, an activist
trade policy might enhance national welfare. In this paper, we provide
some empirical evidence on
whether the these new theoretical possibilities might actually apply to
the policy of VERs.

Discussion and measurement of productivity in the U.S. auto industry are
made difficult by a variety of issues: heterogeneous outputs, big fixed
costs, heterogeneous inputs, multi-product plants, and exchange rates.
One of the goals of this paper is to highlight some of these
difficulties. Another goal is to investigate whether the application of
recent econometric methods can inform the productivity discussion. There
have been recent advances in estimating the demand and cost of
differentiated products using product-level data. Can these methods be
used to further our understanding of productivity in a differentiated
product industry? And do these methods give rise to a view of
productivity that is consistent with or at odds with the related
(non-econometric) literature on productivity in the auto industry? This
paper outlines an econometric framework for investigating productivity
using product-level data and present the results of applying this
approach to data on cars sold in the U.S. from 1971 to 1994. The paper
concludes with a summary of what one can and cannot learn from the
various approaches to measuring productivity in the auto industry.

391. Naito, Hisahiro, "Tariffs and Production Subsidies as Devices
to Relax the Incentive Problem of a Progressive Income Tax System," November 13,
1996. ABSPDF

This paper shows that tariffs and production subsidies can
Pareto-improve welfare in a small open economy when a government is
concerned with income redistribution under asymmetric information.
In international trade theory, free trade is optimal if the government
can use lump-sum taxes and transfers. However, in reality the government
cannot use lump-sum taxes and transfers due to asymmetric information
between the government and individuals. In this case, the government is
restricted to use a non-linear income tax system for income
redistribution due to the incentive compatibility problem. This paper
shows that in such a situation, even if the government is using a
Pareto-efficient non-linear income tax system under free trade, tariffs
and production subsidies can Pareto-improve welfare. That is, tariffs
can complement a Pareto-optimal progressive income tax system under
asymmetric information.

390. Levinsohn, James, "Firm Heterogeneity, Jobs, and International
Trade: Evidence from Chile," October 29, 1996. Published as "Employment Responses
to International Liberalization in Chile," Journal of International Economics
47, April 1999, pp. 321-344. ABSPDF

This paper is about jobs and international trade. It is about what
researchers can learn of the relationship between the two using
firm-level data. It is about the particular experience of Chile
following a broad trade liberalization and spanning significant
macroeconomic contraction and expansion. Finally, this paper is about
discerning patterns in the data that might later influence how
internatinal economists model the interaction between international
trade and employment.

389. Levinsohn, James, "CARWARS: Trying to Make Sense of U.S.-Japan
Trade Frictions in the Automobile and Automobile Parts Markets," March 25, 1996.
In Robert Feenstra, ed., The Effects of U.S. Trade Protection and Trade Promotion
Policies, University of Chicago Press, pp. 11-32, 1997. ABSPDF

This paper tries to make sense of the recent trade dispute between the
U.S. and Japan in autos and auto parts. The paper argues that there are
structural differences between the way that the auto industries are
organized in the U.S. and Japan, and that these differences have
contributed to the growing bilateral trade deficit in auto parts. The
paper also provides econometric estimates of what would have happened
had the threatened 100 percent tariff on Japanese luxury cars not been
withdrawn by the U.S.

The paper provides a brief overview of the new World Trade Organization,
successor to the GATT as the arbiter of cooperation in matters of
international trade policy. The approach taken is to look only at its
main features, asking how they contribute to the end of permitting
countries to cooperate in the use of policies that they often have
strong incentives to use against each other. Noting that many of the
problems of trade policy can be understood in a framework loosely based
on the prisoners' dilemma in game theory, the paper examines four
aspects of the WTO in terms of their contribution to resolving such
prisoner's dilemma problems. These are: first, the various ways that
the WTO fosters communication among countries about what they are in
fact doing with their trade policies; second, the many requirements that
the WTO imposes on country policies in defining cooperative behavior;
third, a number of exceptions to these rules that permit, but do not
require, countries to deviate from some of these requirements; and
fourth, the new dispute settlement mechanism that provides the incentive
for countries to conform with all of the rules. In the end, the WTO is
viewed as a remarkably well-conceived solution to the complex problems
of international cooperation in international trade.

387. Stern, Robert M., "Issues of Trade and International Labor
Standards in the WTO System," September 11, 1996. In Korea Economic Institute,
The Emerging WTO System and Perspectives from East Asia, Joint U.S.-Korea
Academic Studies Vol 7, 1997. ABSPDF

The purpose of this paper is
to explore the different views and the available options for
addressing the issues of labor standards in international trade,
and in particular the view that labor standards ought to be placed high
on the agenda of the World Trade Organization (WTO). The paper begins
with the definition and scope of labor standards, followed by
a summary of theoretical aspects of the economic effects of labor
standards and the available empirical evidence. The monitoring
and enforcement of labor standards are also discussed, concluding with
implications for policy.

This paper is a summary of the 1994 Trade Policy Review of Japan done by
the GATT. This was the third review of Japan's trade policies conducted
as part of the Trade Policy Review Mechanism (TPRM) that was initiated in
1989. The previous reviews covered 1990 and 1992. Under the TPRM, Japan,
the United States, the European Communities, and Canada are to be
reviewed every two years, with other countries to be reviewed every four
to six years or longer. The paper first addresses some of the main
features of Japan's recent domestic and external economic performance.
It then focuses on Japan's trade policies and practices, which constitute
the bulk of Vol. I of the TPRM review. Finally, it summarizes the
current sources of concern about Japan's trade policies.

385. Brown, Drusilla, Alan V. Deardorff, and Robert M. Stern,
"Some Economic Effects of the Free Trade Agreement Between Tunisia and the European
Union," July 22, 1996. In Ahmed Galal and Bernard Hoekman (eds.), Regional
Partners in Global Markets: Limits and Possibilities of the Euro-Med Agreements,
London/Cairo: Center for Economic Policy Research and Egyptian Center for Economic
Studies, 1997. ABSPDF

We use a specially constructed version of the Michigan
Brown-Deardorff-Stern (BDSvkrzv wkdw wklv frqglwlrq lv vx!flhqw lq wkh fdvh ri wzr) Computational General Equilibrium (CGE)
Model of World Production and Trade to estimate the potential economic
effects on the Tunisian economy that may result from the free trade
agreement (FTA) between Tunisia and the European Union (EU) that was
concluded in July 1995. We find that the static welfare benefits for
Tunisia of the FTA range from slightly negative to somewhat positive,
depending on what is assumed about intersectoral capital mobility in
Tunisia. Further, depending on the length of time allowed for the
phasing in of the FTA, Tunisia could experience significant adjustment
problems in connection with the intersectoral movements of labor and
capital that the FTA would induce. Finally, while our computational
scenarios are subject to the difficulties of integrating foreign direct
investment (FDI) into a CGE trade modeling framework, we find that the
FDI inflows into Tunisia that might result from the FTA would not
materially increase Tunisian economic welfare. Our results suggest
therefore that Tunisia may not have much to gain economically from the
FTA. Reducing its trade barriers multilaterally and reinforcing these
actions with further liberalization of its foreign investment policies
and maintenance of macroeconomic and political stability might in the
end be the best path for Tunisia to follow.

This paper proposes an empirical framework to analyze monetary
policies in a small open economy under fixed exchange rates. First, the
analysis proposes a semi-restricted VAR model with the lowest number of
restrictions to focus on the effects of the center-country and the
Rest-of-the-World monetary policies. Next, we use a fully structural
VAR approach where the identifying restrictions are imposed on the
short-run behavior of the variables.

The model is applied to the EMS experience of France, Italy and the
Netherlands by considring Germany as the center country and
the US as the Rest of the World. The
presence of
imperfect capital mobility allows us to attribute partial monetary
independence to the domestic monetary authorities. Innovations in the
German monetary policy are found to be highly important for the Dutch
monetary policy, but much less for France and especially for
Italy. Instead, the US
shock plays a particularly relevant role for the French monetary
policymaking. There is also evidence of stronger recessionary impact of
restrictive German monetary policies on France and Italy rather than
the Netherlands. This may explain why the former two countries
devalued so many times.

383. Deardorff, Alan V., "International Externalities in the
Use of Pollution Policies," Nov. 11, 1995. International Review of Law and
Economics 16, March 1996, pp. 53-59. ABSPDF

The paper examines a simple partial equilibrium model of a
polluting industry in a world economy. Optimal pollution taxes are
derived and compared for the countries individually and collectively.
Objective functions of governments are permitted to give different
weights to producers than to other interests, in recognition of
distributional, political economy, or other objectives. It is shown that
if 1) pollution does not spill across national borders, and if 2)
countries are too small to affect world prices with their pollution
policies, then the pollution taxes that countries set independently
cannot be improved upon by international cooperation. If these
conditions are not satisfied, however, then independently set pollution
policies will not be optimal. If pollution spills across borders, this
will cause countries to set pollution taxes too low. In contrast, if
countries are large enough to affect world prices, then exporting
countries will set pollution taxes too high and importing countries will
set them too low. However, if the two conditions are satisfied, then
pursuit by governments of political-economy or other distributional
objectives does not interfere with their achieving policies that cannot
be improved upon -- in terms of these objectives -- by international
cooperation.

382. Deardorff, Alan V., "Determinants of Bilateral Trade: Does
Gravity Work in a Neoclassical World?" Nov. 7, 1995. In Jeffrey A. Frankel, ed.,
The Regionalization of the World Economy, NBER, Chicago: University of
Chicago Press, 1998, pp. 7-28. ABSPDF

This paper derives equations for the value of bilateral trade from two
extreme cases of the Heckscher-Ohlin Model, both of which could also
represent a variety of other models as well. The first case is
frictionless trade, in which the absence of all impediments to trade in
homogeneous products causes producers and consumers to be indifferent
among trading partners. Resolving this indifference randomly, expected
trade flows correspond exactly to the simple frictionless gravity
equation if preferences are identical and homothetic or if demands are
uncorrelated with supplies, and they depart from that equation
systematically when there are such correlations. The second case is of
countries that each produce distinct goods, as in the H-O Model with
complete specialization or a variety of other models. Expressions are
derived for bilateral trade, first with Cobb-Douglas preferences and then
with CES preferences. The standard gravity equation with trade declining
in distance continues to be a central tendency for these trade flows,
with departures from it that are easily understood in terms of relative
transport costs. The main lessons from the paper are two. First, it is
not all that difficult to justify even simple forms of the gravity
equation from standard trade theories. Second, because the gravity
equation appears to characterize a large class of models, its use for
empirical tests of any of them is suspect.

This paper uses a specially constructed version of the University of
Michigan Brown-Deardorff-Stern Computational General Equilibrium Trade
Model to estimate the potential economic effects of an East Asian
Preferential Trading Bloc including Japan, South Korea, Taiwan, and
Singapore. Effects are computed on trade, output, and employment by
sector as
well as the real returns to capital and labor and the economic welfare of
members of an East Asian bloc, the United States, and the rest-of-world
major trading countries/regions.

This paper is a study of the economic effects of the integration of the
Central European Countries (CECs) into the European Union (EU). Our
analysis of EU-CEC integration is based on a specially constructed
version of the University of Michigan Computational General Equilibrium
(CGE) Trade Model. We use this model to calculate the economic effects
of EU-CEC integration on the trade, output, and employment by sector as
well as the real returns to capital and labor and the economic welfare of
the CECs, the EU members, and the other major trading country aggregates
included in the model.

379. Brown, D. K., A. V. Deardorff, A. K. Fox, and R. M. Stern,
"Computational Analysis of Goods and Services Liberalization in the Uruguay Round,"
August 23, 1995. Published as "The Liberalization of Services Trade: Potential
Impacts in the Aftermath of the Uruguay Round," in W. Martin and L. A. Winters,
eds., The Uruguay Round and the Developing Countries, The World Bank, New
York: Cambridge University Press, 1996. ABSPDF

In this paper, we use a specially constructed version of the Michigan
Brown-Deardorff-Stern (BDSvkrzv wkdw wklv frqglwlrq lv vx!flhqw lq wkh fdvh ri wzr) Computational General Equilibrium (CGE) Model
of World Production and Trade to estimate the potential economic effects
of the reductions in tariffs on industrial products that were negotiated
in the Uruguay Round of Multilateral Trade Negotiations as well as the
effects that might be realized from services-sector liberalization in the
post-Uruguay Round period. The model provides measures for individual
countries/regions of the effects of liberalization on the trade, output,
and employment for the goods and for the services sectors. We also
calculate the effects on economic welfare and on real returns to labor
and capital for the individual countries/regions.

We examine the importance of various characteristics of services for the
modelling of the effects of trade liberalization in services. We
consider first the characteristics that our own computable general
equilibrium (CGE) modelling framework has been designed to address:
variety, scale, and competition. Modifying it somewhat so as to
distinguish the separate roles of these characteristics, we find the
characteristics to be relatively unimportant for the conclusions that one
reaches about the effects of trade liberalization on the economy. We
then consider other characteristics that may distinguish services from
goods, and ask whether these also need to be taken into account in such
modelling exercises. With one exception we conclude that these
characteristics are unlikely to play an important role in future models
of trade liberalization. The one exception is a characteristic
identified by Ethier and Horn (1991), who saw producers of services as
specializing their products to the particular needs of their customers.
While it does not seem feasible at this time to incorporate this feature
into a manageable CGE framework, we believe that it could have
interesting and important implications for our understanding of the
effects of trade liberalization if it were ever done.

377. Pahre, Robert, "Integration and the European Union: A Public
Goods Analysis," May 30, 1995. Published as "Wider and Deeper: The Links between
Expansion and Enlargement in the European Communities," Chapter 6 in Towards
a New Europe: Stops and Starts in Regional Integration, edited by Gerald Schneider,
Patricia A. Weitsman, and Thomas Bernauer, pp. 111-136 (Praeger/Greenwood, 1995).
ABS

Contemporary research on the European Union examines how actors of
varying preferences negotiate bargains or participate in decision-making
through existing institutions. All such studies take actors'
preferences over EU policies as given and outside the analysis. This
paper seeks to explain some of the crossnational and intertemporal
variation in these preferences by capturing part of the structural
background for EU Politics. The hypotheses of the model depend on three
variables: the aggregate resources of all EU members, the resources of
each EU member, and the number of members. Bringing them together in a
single theory is surprisingly fruitful for being able to understand
variation in integration and preferences over integration. This
structural background is analytically prior to decision making theories
or accounts of intra-elite bargaining, and helps explain some features of
negotiation over cost-sharing.

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